PS20/25 – The Strong and Simple Framework: The simplified capital regime for Small Domestic Deposit Takers (SDDTs) – near-final

1: Overview

1.1 This Prudential Regulation Authority (PRA) near-final policy statement (PS) provides feedback to responses the PRA received to consultation paper (CP) 7/24 – The Strong and Simple Framework: The simplified capital regime for Small Domestic Deposit Takers (SDDTs).

1.2 This near-final PS also contains feedback to responses the PRA received to proposals in CP9/24 – Streamlining the Pillar 2A capital framework and the capital communications process, CP13/24 – Remainder of CRR: Restatement of assimilated law that are related to the proposals in CP7/24, and CP14/24 – Large Exposures Framework that are relevant to the proposals in CP7/24.

1.3 The PRA’s ‘Strong and Simple’ Framework is a key PRA initiative designed to deliver a more proportionate and simplified prudential framework for small, domestically focused deposit takers in the UK, while maintaining their resilience. It significantly simplifies the prudential regime for SDDTs and SDDT consolidation entities. ^{footnote [1], footnote [2]} It includes simplifications to all elements of the capital stack, including Pillar 1, Pillar 2A, buffers, the calculation of regulatory capital, and reporting, as well as simplifications to liquidity and disclosure requirements. The PRA considers that the Framework will enhance competition in the UK banking sector because the simplifications will reduce costs for SDDTs. This will increase SDDTs’ capacity to support their customers and broader UK growth. It will also support the competitiveness of the UK by making it a more attractive place for foreign banks to do business.

1.4 This near-final PS represents the second and final phase of the PRA’s ‘strong and simple’ initiative. Phase 2 sets out the simplified capital regime and additional liquidity simplifications for SDDTs. It builds on Phase 1 which focused on simplifications to liquidity and disclosure requirements. The Phase 1 simplifications, along with the criteria that must be met to be an SDDT, were finalised in policy statement (PS) 15/23 – The Strong and Simple Framework: Scope Criteria, Liquidity and Disclosure Requirements and are already available to SDDTs.

1.5 The appendices to this near-final PS contain the PRA’s near-final policy materials detailed below:

• near-final PRA Rulebook: CRR firms: SDDT Regime Instrument [2026] (Appendix 2);
• near-final amendments to supervisory statement (SS) 31/15 – The Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review and Evaluation Process (SREP) (Appendix 3);
• near-final amendments to statement of policy (SoP) 5/15 – The PRA’s methodologies for setting Pillar 2 capital (Appendix 4);
• near-final SoP5/25 – The PRA’s methodologies for setting Pillar 2 capital for Small Domestic Deposit Takers (SDDTs) (Appendix 5);
• near-final SS4/25 – The Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review and Evaluation Process (SREP) for Small Domestic Deposit Takers (SDDTs) (Appendix 6);
• near-final amendments to SoP2/23 – Operating the Small Domestic Deposit Taker (SDDT) regime (Appendix 7);
• near-final amendments to SS3/21 – Non-systemic UK banks: The Prudential Regulation Authority’s approach to new and growing banks (Appendix 8);
• near-final amendments to SS6/14 – Implementing capital buffers (Appendix 9);
• near-final amendments to SS16/16 – The minimum requirement for own funds and eligible liabilities (MREL) – buffers and Threshold Conditions (Appendix 10);
• near-final amendments to SS24/15 – The PRA’s approach to supervising liquidity and funding risks (Appendix 11);
• near-final amendments to SS32/15 – Pillar 2 reporting, including instructions for completing data items FSA071 to FSA082, PRA 111, and PRA119 (Appendix 12);
• near-final amendments to SS34/15 – Guidelines for completing regulatory reports (Appendix 13);
• near-final updated reporting templates and instructions (Appendix 15); and
• corresponding CRR rules – the simplified capital regime for SDDTs (Appendix 18).

1.6 This near-final PS also confirms the deletion of SoP3/23 – Operating the Interim Capital regime at the time of the publication of the final PS about the SDDT capital regime.

1.7 This near-final PS also confirms the descoping of SDDTs from SS31/15 and SoP5/15 from the implementation date of the SDDT capital regime.

1.8 The PRA has not made final rule instruments and policies for the SDDT capital regime at this stage. This is because the Pillar 1 requirements for SDDTs will be based on the final rules for the Basel 3.1 standardised approaches to credit risk and operational risk. The PRA intends to make the final rules and policy covering the entire Basel 3.1 package once HM Treasury (HMT) has made the commencement regulations to revoke the relevant provisions of the Capital Requirements Regulation (CRR).^{footnote [3]} The PRA intends to make all SDDT capital regime final policy materials and rule instruments at the same time as, or shortly after, it makes its final policy on the implementation of the Basel 3.1 standards. The PRA does not intend to change the policy or make substantive alterations to the SDDT capital regime instrument before the making of the final policy material.

1.9 This near-final PS should be of interest to PRA-authorised banks and building societies (‘firms’), PRA-designated UK investment firms, and their qualifying parent undertakings, which for this purpose comprise financial holding companies and mixed financial holding companies, as well as credit institutions, investment firms, and financial institutions that are subsidiaries of these firms, regardless of their location.

1.10 This near-final PS should be of particular interest to SDDTs, firms who meet the SDDT criteria and are considering becoming an SDDT, and entities that do business with SDDTs.

1.11 This near final-PS has been published on Tuesday 28 October 2025 alongside two related publications:

• PS18/25 – Retiring the refined methodology to Pillar 2A – near-final
• PS19/25 – Restatement of CRR requirements – 2027 implementation – near-final

1.12 The PRA encourages stakeholders to also refer to PS14/25 – Large Exposures Framework due to the interaction between the large exposures policy and Chapter 3 in this near final-PS.

1.13 This near-final PS, taken together with the above publications as well as PS17/23 – Implementation of the Basel 3.1 standards near-final part 1, PS9/24 – Implementation of the Basel 3.1 standards near-final part 2, PS12/25 – Restatement of CRR requirements in PRA Rulebook – 2026 implementation and PS8/25 – Updates to the UK policy framework for capital buffers, provide stakeholders with the information on the overall capital framework for SDDTs (covering Pillar 1, Pillar 2A, buffers, and the definition of capital).

Background

1.14 In CP7/24, the PRA proposed to create a significantly simpler capital regime for SDDTs, while ensuring they maintain adequate capital. In summary, the PRA proposed the following:

• a Pillar 1 framework for SDDTs based on the Basel 3.1 standardised approaches to credit risk and operational risk as set out in PS9/24 and PS17/23 respectively;
• simplification of the Pillar 1 framework for SDDTs through the disapplication of the due diligence requirements in the standardised approach to credit risk, simplifications to the market risk framework, the disapplication of capital requirements for counterparty credit risk for derivatives (with some minor exceptions) and credit valuation adjustment (CVA) risk, and consequential changes to the Leverage Ratio and Large Exposures rules;
• simplifications to the Pillar 2A methodologies for credit risk, credit concentration risk, and operational risk;
• a new Single Capital Buffer (SCB) framework, descoping SDDTs from the current buffers framework (consisting of the Capital Conservation Buffer and Countercyclical Capital Buffer (CCyB), which together make up the combined buffer, and the PRA buffer), and the removal of automatic capital conservation measures under the maximum distributable amount (MDA) framework;
• the replacement of the current cyclical stress testing framework with a non-cyclical framework;
• removal of the CCyB adjustment between buffers and Pillar 2A which, in addition to the proposal to retire the refined methodology set out in CP9/24, would make the capital stack much simpler for SDDTs;
• simplifications to the Internal Capital Adequacy Assessment Process (ICAAP) and a reduction in the frequency SDDTs (other than new and growing banks) would be required to review and update their Internal Liquidity Adequacy Assessment Process (ILAAP);
• simplifications to certain complex capital deduction rules;
• simplifications to reporting requirements, in line with the proposals in CP7/24;
• the revocation of the Interim Capital Regime (ICR) so that firms that opted into the ICR would be required to implement either the full Basel 3.1 standards^{footnote [4]} on 1 January 2026 or the simplified capital regime for SDDTs on 1 January 2027 implementation date; and
• some changes to the way the SDDT regime will operate in light of the proposed changes to the capital regime for SDDTs.

1.15 In carrying out its policy making functions, the PRA is required to have regard to its framework of regulatory principles. In CP7/24 the PRA explained how it had regard to the regulatory principles it considered most material to the proposed policy. Chapters 2-8 in this near-final PS refer to that analysis and updates to the analysis to reflect the near-final policy.

Summary of responses

1.16 The PRA received 18 responses to CP7/24. The PRA also considered responses related to the simplified capital regime that were sent to CP9/24 and CP13/24, as well as a response to CP14/24 about an interaction between the proposals in that CP and the Pillar 2A proposals in CP7/24. The names of respondents to CP7/24 who consented to their names being published are set out in Appendix 1.

1.17 Respondents warmly welcomed most of the PRA’s proposals set out in CP7/24. The PRA considers this is also supported by the fact the number of SDDTs has increased since the publication of the CP. As of 13 October 2025, 56 firms have opted in to become an SDDT out of around 80 firms that the PRA estimate could be eligible, with 24 of which having become an SDDT since CP7/24 was published.

1.18 Respondents raised questions and concerns about elements of the simplified capital regime for SDDTs. These included requests for additional guidance and changes to specific proposals in favour of treatments that respondents considered would be more proportionate, less operationally burdensome, or which would lead to a more appropriate impact on SDDTs’ capital requirements and buffers.

1.19 The substantive issues raised in the responses are addressed in detail in the relevant chapters of this near-final PS. Where the PRA has made material changes to its proposed policies, it has updated the relevant objectives and have regards analysis in the relevant chapters.

Feedback to responses

1.20 Before making any proposed rules, the PRA is required by FSMA to have regard to any representations made to it in response to the consultation, and to publish an account, in general terms, of those representations and its feedback to them.^{footnote [5]}

1.21 In determining its near-final policy, the PRA has considered the representations received in response to CP7/24. The PRA has also considered the comments related to Pillar 1, Pillar 2A, and simplified capital deductions proposals in CP7/24 that were included in representations in response to CP9/24, CP13/24 and CP14/24. Chapters 2-9 of this near-final PS contain a general account of the representations made in response to the proposals set out in the corresponding CP7/24 chapters as well as the related feedback and the near-final policy. In addition, this overview chapter contains a general account of the representations made in response to the PRA’s approach to designing the SDDT regime.

1.22 The PRA also received a few general responses regarding the proposed simplified capital regime for SDDTs, which are addressed in this chapter.

1.23 Three respondents expressed their view that the proposals should have gone further to facilitate effective competition and promote economic growth. Another respondent expressed the view that the only potential benefit of the CP7/24 proposals would stem from reduced costs related to the ICAAP simplifications proposals.

1.24 The PRA has maintained its view that the simplified capital regime for SDDTs set out in this near-final PS would create a significantly simpler capital regime for SDDTs while ensuring they maintain adequate capital. See also Chapter 9 where the PRA has provided feedback on related responses about the aggregated cost benefit analysis (CBA) in CP7/24.

1.25 Three respondents to the CP7/24 expressed their view that there is a high risk of the SDDT capital regime policies being subject to gold-plating over time. They asked the PRA to take measures to address this, including engagement with stakeholders to ensure proportionate implementation of the SDDT regime, and providing detailed guidance to avoid an overly prudent interpretation of the SDDT regime. They also asked the PRA to set out the high-level principles of how it will make supervisory judgments, and to set out internal processes to assess proportionality of implementation the SDDTs regime. One respondent also urged caution in the way supervisory judgement would be applied in relation to certain elements of the CP7/24 proposals because the uncertainty it could create could affect SDDTs’ capital planning.

1.26 The PRA has considered these responses and notes that it already has in place several internal and external processes, as well as its framework of objectives and regulatory principles, for ensuring that the PRA’s policies are proportionate and thereby reducing the risk of gold-plating. Changes in the near-final policy also reduce the risk of gold-plating.

1.27 The PRA is required, so far as is reasonably possible, to act in a way which facilitates its secondary objectives, including the facilitation of the international competitiveness of the UK economy and its growth in the medium to long term. In addition, the PRA must ‘have regard’ to certain public policy considerations when making policy, including the proportionality of its regulation.

1.28 Firms can find in The PRA’s approach to banking supervision how the PRA carries out its supervisory role and more information on its supervisory approach. SoP1/25 – The Prudential Regulation Authority’s approach to policy communicates to firms the PRA’s approach to making policy and provides guidance on how the PRA advances its objectives. It also describes the PRA’s approach to stakeholder engagement through the policy cycle. The PRA had been engaging extensively with a wide range of stakeholders on the CP7/24 proposals (eg regulated firms, trade bodies, and the PRA Practitioner Panel), through a range of methods of engagement, including publishing a discussion paper (DP) 1/21 – A strong and simple prudential framework for non-systemic banks and building societies, webinars, speeches, and conferences.

1.29 In addition, the PRA is exploring a new initiative, Banking Policy Roundtables, to enhance its policy-making efforts and to facilitate a regular and constructive engagement between the industry and the PRA over policy development. The roundtables could be used for providing clarifications on PRA’s new policies or for having a deeper discussion between the PRA and the industry on existing ‘mature’ policies (for example when the industry wishes to bring to the PRA’s attention new evidence, possibly around unintended effects). The PRA expects to hold roundtables to support the implementation of Strong and Simple.

1.30 The PRA has made a number of adjustments and clarifications to the draft policy and provided additional guidance to address the respondents’ comments about gold-plating as well as responses that were made in relation to other policies that were proposed in CP7/24 where deemed appropriate. More details can be found in paragraphs 1.38-1.41 below and detailed in the relevant chapters of this near-final PS.

1.31 In summary, the PRA considers that the risk of gold-plating occurring in the SDDT regime policies over time is appropriately addressed by its existing practices, including meeting the legal obligations in the PRA’s policy making process and its engagement with stakeholders (eg the Banking Policy Roundtables), as well as the adjustments to the SDDT capital regime and the additional guidance set out in this near-final PS.

1.32 Two respondents also provided general comments on PRA’s proposed design of the simplified capital regime for SDDTs. They asked the PRA to compare it with the regulatory regimes that apply to non-systemic firms in other jurisdictions, and one of them also questioned the PRA’s decision to follow a ‘streamlined approach’ when developing the SDDT regime policies. One respondent agreed with the PRA’s statement that CP7/24 proposals will not impact the UK's ability to fully align with the Basel framework for larger banks.

1.33 The PRA notes that DP1/21 set out the options for developing a simpler prudential framework for small firms (including the relative merits of the options) and also summarised the prudential regulation of small banks in other jurisdictions. In PS15/23 the PRA has finalised its decision to follow a ‘streamlined approach’ to developing the SDDT regime, which was favoured by the majority of the respondents to the DP. In the PS, the PRA noted that this approach would keep the Strong and Simple Framework proportionate and help firms transition out of the SDDT regime more easily and at lower cost.

1.34 One respondent suggested the PRA should conduct and publish a review of the SDDT regime at an appropriate time after it is implemented. Another respondent argued the total-asset threshold in the SDDT criteria should be higher to capture larger non-systemic firms. It suggested a higher threshold could be applied to the SDDT regime and other requirements.

1.35 FSMA, as amended by the Financial Services and Markets Act 2023, introduced a statutory requirement for the PRA to keep its rules under review and to prepare and publish a statement of its policy relating to its review of rules.^{footnote [6]} The PRA keeps rules that it has implemented under review, as set out in the PRA statement on the review of rules. In the specific case of the SDDT regime, the PRA has committed to reviewing the SDDT criteria no later than the end of 2028.^{footnote [7]} The PRA would assess whether the SDDT criteria and the calibrations of the thresholds within the criteria are still identifying relevant firms as part of that review. However, the PRA considers the current total-asset threshold in the SDDT criteria balances the ability to provide significant simplifications for smaller firms while giving those firms room to grow while they are SDDTs. The PRA and the wider Bank have made significant progress in key areas of concerns for mid-tier firms (see paragraphs 1.58-1.59).

Changes to draft policy

1.36 This near-final PS takes account of how the policy advances the PRA objectives and of significant matters that the decision maker had regard to. These are as set out in CP7/24, with the following changes/additional points.

1.37 Where the final rules differ from the draft in the CP in a way which is, in the opinion of the PRA, significant, the Financial Services and Markets Act 2000 (FSMA)^{footnote [8]} requires the PRA to publish:

• details of the differences together with an updated CBA; and
• a statement setting out in the PRA’s opinion whether or not the impact of the final rules on mutuals is significantly different from: the impact that the draft rule would have had on mutuals; or the impact that the final rule will have on other PRA-authorised firms.

1.38 Taking into account the responses to CP7/24, and responses to proposals related to the SDDT capital regime that were in CP9/24, CP13/24 and CP14/24, the PRA has made a number of adjustments and clarifications to the policy proposed in CP7/24 where it considers this to be appropriate. The most material changes to the policy proposed in CP7/24 include the following.

• The removal of the bucketing approach for operational risk in the Pillar 2A framework for SDDTs. The PRA has considered responses and decided not to implement the bucketing approach proposed in CP7/24. SDDTs will still be expected to conduct the existing scenario analysis but based on clearer and more proportionate expectations for SDDTs undertaking their own Pillar 2A operational risk assessment as proposed in CP7/24.
• Minor amendments to the calculation of the Pillar 2A credit concentration risk (CCoR) base add-ons, including the exclusion of eligible covered bonds. Some of the issues raised by respondents will also be considered as part of the broader review of the Pillar 2A approach for firms of all sizes.
• Amendments to the proposed Pillar 2A CCoR single-name concentration monitoring (ie cluster limit) to improve risk sensitivity and transparency for firms. SoP5/25 excludes exposures to credit institutions from the cluster limit calculation and correspondingly tightens the limit, which is a trigger for supervisory engagement, to 200%.
• Reductions in the minimum expected frequency of Pillar 2A and Pillar 2B updates to ICAAP documents for SDDTs (excluding those which are new and growing banks) from annually to every two years, in line with the frequency of updates to the overall ICAAP and ILAAP documents.
• Amendments to the treatment of certain exposures by mandating full deduction of qualifying holdings outside the financial sector, certain securitisation positions, and free deliveries, instead of applying a threshold-based approach, to simplify the framework and avoid disproportionate capital charges.
• Further simplification to reporting requirements for SDDTs by increasing the number of descoped templates from 38 to 51, and by introducing SDDT-specific versions of four additional templates to enhance clarity and accessibility.

1.39 The PRA considers that the changes to the policy proposed in CP7/24, including those listed above, set out in the near-final policy are appropriate to reflect risks in a more proportionate manner, further reduce operational burden on firms, enhance the relative standing of the UK, and improve the clarity of rules in a manner that aligns with the PRA’s statutory objectives. The changes reflect the evidence and arguments that respondents provided in their consultation responses. Further details on all substantive issues raised in responses, and any related amendments to the draft policy, are set out in the relevant chapters of this near-final PS.

1.40 The PRA has considered respondents’ requests for additional guidance and has taken steps to improve clarity and transparency in the near-final policy and supporting materials. Specifically, the PRA is:

1. Setting clearer expectations for scenario analysis under the SDDT Pillar 2A operational risk methodology;
2. Clarifying the implications of breaching the cluster limit in the SDDT Pillar 2A framework and confirming that its design is aligned with the more recent large exposures proposals;
3. Providing an example of the new non-cyclical stress test scenarios (renamed the ‘SDDT scenarios’) (Appendix 16) to illustrate how it differs from current scenarios for non-systemic firms and serves as a severity benchmark for firms’ ICAAP stress testing;
4. Explaining the risk management and governance (RMG) scalar by including a stylised example of how the related capital add-on is calculated; and
5. Clarifying expectations for qualitative reverse stress testing, including the types of analysis that may be appropriate in a non-quantitative context.

1.41 The PRA has also made a number of less material amendments and clarifications to the SSs and SoPs, and minor drafting amendments to the near-final rules, which are not described in the near-final PS. The PRA has also made a number of amendments and clarifications to reporting templates and instructions, the most significant of which are described in this near-final PS. Amendments and clarifications to the reporting templates and instructions are included in the near-final updated reporting templates and instructions (Appendix 15).

1.42 The PRA does not consider the difference between the rules proposed in CP7/24 and the near-final rules set out in Appendix 2 to be significant. However, to help stakeholders understand the impact of differences between the proposals and near-final rules, this near-final PS includes estimates of the benefits associated with the reporting requirements and compares those with the estimates of the benefits under the proposals. This near-final PS also provides updated estimates of the benefits of the reforms to the frequency of updates to SDDTs’ ICAAP documents (which is set out in SS4/25). See paragraphs 9.58 and 9.59 in Chapter 9 of this near-final PS for more detail.

1.43 As with the proposals in CP7/24, the only group of mutuals within scope of the near-final policy set out in this near-final PS are SDDT-eligible building societies. The PRA considers that these firms would have the opportunity to benefit significantly from the simplified capital regime available to SDDTs. The PRA also does not consider that the impact of the near-final policy and rules in this near-final PS would have a significantly different impact on building societies relative to the impact of the draft policy and rules or that any differences between the impact of the SDDT capital regime on building societies relative to banks with a similar focus on residential mortgages differ significantly between the near-final policy and rules in this near-final PS and the draft policy and rules.

1.44 When making rules, the PRA is required to comply with several legal obligations. In CP7/24, the PRA published its explanation of why the rules proposed by the CP were compatible with its objectives and with its duty to have regard to the regulatory principles.^{footnote [9]} The PRA has provided updated explanations of why the near-final rules (and policies) are compatible with its objectives in Chapters 2-8, taking into account the consultation responses.

1.45 In developing the near-final policy, the PRA has had regard to its framework of regulatory principles. Updates to the regulatory principles the PRA considers most material to the policy are set out in Chapters 2-8.

1.46 When making CRR rules, the PRA must consider and consult the HM Treasury (HMT) about the likely effect of the rules on relevant equivalence decisions. The PRA has done so and received no further comments.

1.47 In addition, when making CRR rules or rules applying to certain holding companies, the PRA must also publish a summary of the purpose of the proposed rules.^{footnote [10]} The PRA has included this summary in this near-final PS. The purpose of the proposed rules would be to contribute to the creation of a simplified capital regime for SDDTs that also maintains the resilience of these firms. The regime is looking to simplify capital requirements that are disproportionate for SDDTs in the sense that they may find the costs of understanding, interpreting, and operationalising these requirements higher relative to the associated public policy benefit.

1.48 The PRA is publishing in Appendix 18 a near-final document identifying updates to the PRA’s published tables of corresponding CRR rules.

Structure of the near-final policy statement

1.49 This near-final PS is structured into the following chapters which correspond with the respective chapters of CP7/24. The near-final rules and related policy material are included in the relevant appendices.

• Chapter 2 – Pillar 1
• Chapter 3 – Pillar 2A
• Chapter 4 – Capital Buffer Framework
• Chapter 5 – The Internal Capital Adequacy Assessment Process (including proposals to change the frequency of the Internal Liquidity Adequacy Assessment Process)
• Chapter 6 – Simplified capital deductions
• Chapter 7 – Reporting
• Chapter 8 – Operating the SDDT regime
• Chapter 9 – Cost benefit analysis (CBA)

Level of application

1.50 The PRA did not receive any responses to its proposals on level of application. The PRA confirms the levels of application for the SDDT capital regime in the near-final policy are as set out in CP7/24.

Implementation and next steps

1.51 The PRA intends to publish the final SDDT capital regime policies and rule instruments in a final PS in 2026 Q1, alongside, or shortly after, it publishes the final PS covering the entire Basel 3.1 package.

1.52 In CP7/24, the PRA consulted on an implementation date for its policies, other than certain changes to SoP2/23, of 1 January 2027.^{footnote [11]} Three respondents to the CP noted their support for the proposed implementation date.

1.53 Having considered these responses, the PRA has decided to maintain the implementation date. As such, the policy that will be published in the final PS is intended to take effect from 1 January 2027, other than the changes to SoP2/23 which would take effect at the time of the publication of the final PS (see more details in Chapter 8 of this near-final PS). The PRA also considered the responses related to the implementation date of the rules and expectations relating to ICAAP and ILAAP frequency and has decided that these changes will take effect from the date of publication of the final PS (see more details in Chapter 5 of this near-final PS).

1.54 When CP7/24 was published, the PRA had planned to implement the Basel 3.1 standards before the capital regime for SDDTs. The ICR would have allowed SDDT-eligible firms to avoid applying the Basel 3.1 standards before the implementation of the SDDT capital regime. CP7/24 set out the proposal to revoke the ICR when the SDDT capital regime was implemented. Given the implementation dates for the SDDT capital regime and Basel 3.1 are now the same, the ICR is no longer needed. The PRA will revoke the existing rules relating to the definition of an ICR firm and an ICR consolidation entity and delete SoP3/23. These changes will be implemented at the time of the publication of the final PS about the SDDT capital regime. See Chapter 8 in this near-final PS for further details.

1.55 Any references related to the UK’s membership of the EU in the SSs and SoPs covered by the near-final policy in this near-final PS will be updated as part of the final PS to reflect the UK’s withdrawal from the EU. Unless otherwise stated, any remaining references to EU or EU-derived legislation are to the version of that legislation which forms part of retained EU law in the UK.

Further simplifications proposals

1.56 Three respondents made comments in relation to how the PRA’s proposals in CP7/24 might be applied to a wider set of firms that are not internationally active. In CP7/24, the PRA noted that, as it progresses the implementation of the Strong and Simple Framework, it will consider whether its primary and secondary objectives would be advanced by applying any of the proposals in the CP to a wider range of firms and engage the Financial Policy Committee (FPC) where relevant. The PRA noted further that DP1/21 and CP4/23 – The Strong and Simple Framework: Liquidity and Disclosure requirements for Simpler-regime Firms suggested that the PRA would consider whether and how to build out other layers of the Strong and Simple Framework for larger firms that are not internationally active (‘mid-tier firms’).

1.57 In 2023, the PRA held roundtables with mid-tier firms to seek input and understand their challenges. Key areas of concern that were raised by participants included: uncertainty arising from the final policy and implementation date for Basel 3.1; the length of time and complexity for mid-tier firms to gain approval for the use of Internal Ratings Based (IRB) models; mid-tier firms’ perceived complexity of the PRA’s Pillar 2A methodologies; and the difficulties and costs faced by smaller firms in meeting minimum requirements for own funds and eligible liabilities (MREL).

1.58 Since then, the PRA and the wider Bank have made significant progress in these key areas of concern for mid-tier firms. For example, the PRA has published near-final policies on the Basel 3.1 standards for implementation on 1 January 2027. In July 2025, the PRA published DP1/25 – Residential mortgages: Loss given default (LGD) and probability of default (PD) estimation which set out its exploratory thinking on the design of a potential simplified IRB approach for medium-sized firms. The PRA has published a consultation on the PRA’s Pillar 2A approach in CP12/25 – Pillar 2A review – Phase 1 with the aim of simplifying and improving transparency over the PRA’s Pillar 2A methodologies. In addition, in July 2025 the Bank of England (the ‘Bank’) published a PS – Amendments to the Bank of England’s approach to setting a minimum requirement for own funds and eligible liabilities (MREL), which set out several changes relating to the MREL framework and the Bank’s indicative thresholds for setting a stabilisation power preferred resolution strategy. These included raising the indicative total assets thresholds to £25-40 billion from January 2026.

1.59 The PRA considers that the steps taken in these key areas of concern for mid-tier firms, together with changes the PRA has made in other areas (such as the Senior Managers and Certification Regime^{footnote [12]} and remuneration^{footnote [13]}) will deliver significant simplifications for firms, including mid-tier firms, while maintaining appropriate levels of resilience.

1.60 As new policies are being developed, the PRA may assess them and consider whether they can be simplified further for SDDTs, in line with the Strong and Simple Framework principles. The PRA may also assess them and consider whether to potentially make any adjustments for mid-tier firms.

2: Pillar 1

Introduction

2.1 This chapter provides feedback to responses to Chapter 2 of CP7/24, which set out the PRA’s proposals for the Pillar 1 risk-based capital requirements for SDDTs. This chapter also sets out the PRA’s near-final policy on the Pillar 1 risk-weighted capital requirements for SDDTs following the consultation.

2.2 In CP7/24, the PRA proposed to apply the Pillar 1 capital requirements (that apply to all firms) to SDDTs, but to simplify elements within those requirements for SDDTs. In summary, the PRA proposed to:

• apply the PRA’s implementation of Basel 3.1 standards for calculating Pillar 1 RWAs for credit risk (except the due diligence requirements) and operational risk to SDDTs;
• descope SDDTs from Pillar 1 capital requirements for counterparty credit risk (CCR) for derivatives (with some exceptions) and credit valuation adjustment (CVA) risk;
• require SDDTs to apply the credit risk approach to measuring Pillar 1 capital requirements for positions in the trading book, as well as removing market risk capital requirements for SDDTs’ business activities subject to foreign-exchange and commodity risks; and
• remove the Interim Capital Regime (ICR) at the point when the SDDT capital regime is implemented.

2.3 This chapter also covers related proposals made in CP13/24. These proposals supported the proposal in CP7/24 to descope SDDTs from Pillar 1 capital requirements for CCR.

2.4 The PRA received 13 responses to its proposals for the Pillar 1 capital requirements for SDDTs. Respondents generally supported the proposals but argued for specific adjustments to the standardised approach to credit risk (CR SA) and requested clarifications. For example, four respondents supported the proposal to base the Pillar 1 framework for SDDTs on Basel 3.1 with some simplifications.

2.5 Having considered the responses to the consultation, the PRA has decided to make minor amendments to the rules to add greater clarity for SDDTs.

2.6 The appendices to this near-final PS contain the PRA’s near-final policy which will amend the:

• PRA Rulebook Glossary
• Credit Risk: General Provisions (CRR) Part of the PRA Rulebook
• Credit Risk: Standardised Approach (CRR) Part of the PRA Rulebook
• Credit Risk Mitigation (CRR) Part of the PRA Rulebook
• Credit Valuation Adjustment Risk Part of the PRA Rulebook
• Counterparty Credit Risk (CRR) Part of the PRA Rulebook
• Large Exposures (CRR) Part of the PRA Rulebook
• Leverage Ratio (CRR) Part of the PRA Rulebook
• Market Risk: General Provisions (CRR) Part of the PRA Rulebook
• Market Risk: Internal Model Approach (CRR) Part of the PRA Rulebook
• Market Risk: Advanced Standardised Approach (CRR) Part of the PRA Rulebook
• Market Risk: Simplified Standardised Approach (CRR) Part of the PRA Rulebook
• Operational Risk Part of the PRA Rulebook
• Required Level of Own Funds (CRR) Part of the PRA Rulebook
• SDDT Regime – General Application Part of the PRA Rulebook
• Trading Book (CRR) Part of the PRA Rulebook
• SoP2/23 – Operating the Small Domestic Deposit Taker (SDDT) (Appendix 7)

2.7 There are more details about the responses and the near-final policy in the sections below. These sections are structured broadly along the same lines as Chapter 2 of CP7/24. The related proposals in CP13/24 are discussed in the sections about credit risk and CCR, respectively. Reporting changes related to the Pillar 1 proposals (which were set out in Chapter 7 of CP7/24) are discussed in Chapter 7 of this near-final PS.

Credit risk

2.8 The PRA proposed that SDDTs must calculate RWAs using the CR SA and the available credit risk mitigation (CRM) methods set out in PS9/24. The PRA proposed that SDDTs would not be subject to the due diligence requirements in the CR SA.

2.9 Three respondents explicitly supported the proposal that SDDTs would be subject to the CR SA as set out in PS9/24, and two respondents supported the proposal that SDDTs would not need to apply the due diligence requirements in the CR SA.

2.10 More broadly, whilst respondents generally supported the proposal that SDDTs would be subject to the CR SA as set out in PS9/24, they argued that specific adjustments to the CR SA should be made for SDDTs. Two respondents suggested the PRA should consider whether it is appropriate to apply the Basel 3.1 standards for the CR SA to SDDTs given it was developed for internationally active firms. Three respondents asserted that the differential in capital requirements between firms using the CR SA and the Internal Ratings Based (IRB) approach should be closed as it has a negative effect on competition. One of these respondents directly referred to the Basel 3.1 output floor and argued that given it will not be fully phased-in until 2030, firms using the IRB approach will enjoy a continued competitive advantage during that period. Finally, one respondent suggested that the PRA should give more support to firms to transition to the IRB approach by publishing aggregate data.

2.11 The PRA considers that the CR SA set out in PS9/24 is a prudent and proportionate approach which delivers a greater level of risk sensitivity whilst being a relatively simple approach. Therefore, the PRA considers that its application of the CR SA and the available CRM methods to SDDTs delivers an appropriate level of resilience and advances the PRA’s primary objective in a proportionate manner.

2.12 Furthermore, the PRA considers that the improvement in the risk sensitivity of the CR SA under Basel 3.1 limits divergences between the IRB approach and CR SA,^{footnote [14]} and having a common approach between SDDTs and non-SDDTs avoids creating additional barriers to growth and facilitates effective competition. The PRA considers that having a common approach also preserves the benefits of having a consistent and comparable calculation of Pillar 1 RWAs for firms inside and outside the SDDT regime, eg assisting the PRA in efficient supervision of firms. The PRA also considers that the risk of a given activity, such as low LTV mortgage lending, for a firm using the CR SA is unaltered by the size of the firm doing the lending.

2.13 In regard to the PRA supporting firms to transition to the IRB Approach, the PRA notes the publication of DP1/25 which sets out ideas on potential changes to probability of default modelling for residential mortgages under the IRB Approach, and the potential introduction of a Foundation IRB Approach for residential mortgages, to address barriers to entry to the IRB approach.

The treatment of real estate exposures

2.14 Respondents also raised more detailed points on the following specific areas of the treatment of real estate exposures in the CR SA.

• Treatment of regulatory residential real estate exposures that are materially dependent on the cash-flows generated by the property: One respondent argued that the PRA should reconsider its proposal to implement the risk weight treatment set out in PS9/24 for regulatory residential real estate exposures that are materially dependent on the cash-flows generated by the property. The respondent argued that the PRA should align the risk weight treatment for these exposures with the loan splitting approach for exposures that are not materially dependent on the cash-flows generated by the property.
• Mixed real estate exposures: One respondent argued that the treatment of mixed real estate exposures was overly conservative and could have the unintended consequence of making firms less likely to take commercial real estate collateral.
• Self-build exposures: Two respondents highlighted that the haircut applied to property valuations for self-build exposures was introduced as part of near-final rules in PS9/24, with one of the respondents asserting it was not part of the consultation in CP16/22 –Implementation of the Basel 3.1 standards and was not justified by evidence. One of the respondents suggested that the haircut applied to property valuations would create a double count due to conservatism embedded into valuations for self-build properties. Additionally, the respondents stated that the proposal would not support the transition to net zero and that lending to self-build properties is commonly the most ecologically friendly lending undertaken.
• Exposures with a currency mismatch: Two respondents argued that when considering exposures subject to currency mismatch, special consideration should be given to lending to individuals that work in the Republic of Ireland that are using their primary residence in Northern Ireland as collateral.
• Complexity: One respondent highlighted that the proposal to use the CR SA, as set out in PS9/24, would lead to an increase in complexity and substantial implementation costs for real estate exposures relative to using the current CRR, particularly in relation to valuation requirements and the determination of whether existing real estate exposures are materially dependent on the cash-flows generated by the property.
• Valuations: One respondent welcomed the clarification on permissible valuation methods for real estate collateral in the CR SA.

2.15 Having considered these responses, the PRA has decided not to amend its draft policy for the specific areas highlighted by respondents and to maintain in the near-final policy the proposed approach, which is to require firms to comply with the CR SA and the available CRM methods as set out in PS9/24. The PRA notes that many of the points raised were also raised in response to the proposals in CP16/22 and were considered by the PRA when developing the near-final policy set out in PS9/24. Respondents did not provide further data to justify tailoring the risk weight treatment for SDDTs in the specific areas listed in paragraph 2.14 above, nor have respondents presented compelling arguments that the proposals are overly complex or burdensome for SDDTs relative to other firms subject to the CR SA.

2.16 Regarding new issues that were not already raised in response to the proposals in CP16/22:

• the PRA considers that it did not receive any persuasive evidence that the risks associated with a currency mismatch were materially reduced in the example raised by respondents, and so does not consider a specific treatment would be appropriate;
• the PRA notes that the treatment for self-build exposures set out in PS9/24 was amended from the version consulted on in CP16/22 in response to comments received and is significantly more proportionate than the proposal in CP16/22. The PRA did not receive any evidence or data to support respondents claims that the haircut was not justified from a risk perspective. The PRA continues to consider that the capital requirements for unfinished self-build properties should reflect the greater uncertainty of their valuations relative to those of finished properties, including as a result of different market liquidity in a downturn given the number of prospective buyers. Therefore, the PRA considers that the requirement to apply a haircut on valuations for self-build exposures advances the PRA’s primary objective in a proportionate manner.

Requests for clarification

2.17 Additionally, respondents requested that the PRA clarify aspects of the near-final rules set out in PS9/24:

• one respondent asked the PRA to clarify that the valuation methods that SDDTs currently use for pricing and risk management purposes remain acceptable under the CR SA, to publish detailed implementation guidance for real estate valuation methods, and to provide guidance on the implementation of the revaluation backstop;
• one respondent requested confirmation that the 50% UK residential mortgage commitments conversion factor is applied to the loan amount only and not the security value in relation to real estate exposures under the loan-splitting approach; and
• one respondent asked the PRA to clarify whether the Pillar 1 credit risk calculation should be before or after the recognition of the impact of credit risk mitigation.

2.18 The PRA has decided not to publish any further clarifications or guidance that relate to the CR SA and the available CRM methods set out in PS9/24 as part of this near-final PS. The PRA does not consider that this would be appropriate given the CR SA and CRM methods also apply to firms outside the scope of this near-final PS. However, the PRA will consider these responses and make any amendments to clarify its near-final Basel 3.1 rules as part of its final policy statement on its Basel 3.1 final rules if necessary. As part of future policy evaluation, if the PRA observes inconsistent implementation across firms, then the PRA may also publish more detailed guidance.

Operational risk

2.19 The PRA proposed that SDDTs use the standardised approach to operational risk (OR SA) set out in PS17/23 to calculate Pillar 1 operational risk capital requirements.

2.20 The PRA received one response to the proposal in support of SDDTs using the OR SA to calculate Pillar 1 operational risk capital requirements. Another respondent questioned whether Pillar 1 operational risk capital requirements could be replaced with the proposed Pillar 2A approach to operational risk given it was substantially simpler than the Pillar 1 calculation.

2.21 Having considered these responses, the PRA will implement the proposal for SDDTs to use OR SA in the near-final policy. As set out in CP7/24, the PRA considers the OR SA enhances the safety and soundness of firms and is proportionate, but that is important to assess operational risk as part of Pillar 2A too. A summary of the responses to the proposed approach to operational risk in Pillar 2A for SDDTs and the PRA’s near-final policy for this part of the package are set out in Chapter 3.

Market risk

2.22 The PRA proposed that SDDTs calculate Pillar 1 capital requirements for their trading book business using the Basel 3.1 standardised approach to credit risk and that SDDTs would not have to calculate market risk capital requirements for business activities subject to foreign exchange and commodity risk.

2.23 Three respondents commented on these proposals, all of which were supportive.

2.24 The PRA will therefore implement the proposals as set out in CP7/24: see Annexes N-Q, Annex V, and Annex Z in the near-final rule instrument (Appendix 2).

Foreign exchange permissions

2.25 The PRA proposed to use the power conferred under s.138BA of FSMA 2023 to offer foreign exchange permissions^{footnote [15]} to SDDTs, so an SDDT could continue to use a foreign exchange permission for the purposes of assessing itself against the SDDT criteria.

2.26 The PRA received no responses to this proposal and will implement it as set out in CP7/24: see Annex W in the near-final rule instrument (Appendix 2) and paragraphs 2.7-2.11 in SoP2/23 (Appendix 7).

2.27 In CP7/24, the PRA set out that the paragraphs about foreign exchange permissions in SoP2/23 would come into effect on 1 January 2027 while the other proposed changes to the SoP would take effect upon the publication of the PS.^{footnote [16]} Having further considered the implementation of the changes to the SoP, the PRA has decided to add paragraph 2.7 to the SoP. The paragraph explains that paragraphs 2.8-2.11 reflect the position from 1 January 2027 onwards but if a firm wanted to apply for the s.138BA permission before 1 January 2027 (to come into effect on 1 January 2027), then it can do so. This means a firm could have the permission in place when the SDDT capital regime is implemented. The inclusion of paragraph 2.7 means the PRA will not need to publish a further version of the SoP after the version it will publish at the same time as the final PS in order to set out its final policy on FX permissions.

Counterparty credit risk and credit valuation adjustment risk

Counterparty credit risk

2.28 The PRA proposed that SDDTs would not need to calculate Pillar 1 capital requirements for CCR for derivatives in the banking book and the trading book (with certain exceptions), including for credit derivatives, where a CCR method would need to be used to determine the exposure value. The exceptions were: if an SDDT is a clearing member of a Central Counterparty (CCP), it must maintain capital against any contributions to the default fund of a CCP and trade exposures to the CCP; and if an SDDT has a securitisation position that results from a derivative instrument listed in Annex II of the CRR, the references to the exposure measure in the CCR part of the rules would continue to apply.

2.29 Four respondents supported the proposed removal of the CCR capital requirements for SDDTs (acknowledging the exceptions). The majority of the comments centred around the statement that SDDTs were expected to use central counterparties to clear derivative contracts, with four respondents noting the associated high costs and operational burden this would place on firms and their business models. One respondent sought clarification on the proposed treatment of a securitisation position that results from a derivative instrument listed in Annex II of the CRR.

2.30 The PRA has considered these responses and will implement the proposals as set out in CP7/24: see Annexes I and V in the near-final rule instrument (Appendix 2). The PRA acknowledges that the wording in CP7/24 around the expectations on SDDTs to collateralise their exposures and use central counterparties to clear derivative contracts may have been unclear. The PRA can clarify that, as part of prudent CCR management practices, SDDTs are encouraged to collateralise their exposures or use central counterparties to clear derivative contracts, but it is not a requirement. The PRA can also clarify that for exposures to securitisation positions that result from a derivative instrument listed in Annex II of the CRR, SDDTs will continue to be required to calculate CCR capital requirements for these specific exposures due to the sophisticated nature of this type of transaction.

2.31 In CP7/24, the PRA proposed amendments to the Counterparty Credit Risk (CRR) Part of the PRA Rulebook that would mean SDDTs cannot use the Internal Models Method (IMM) to calculate exposure values. In CP13/24, the PRA proposed further amendments to provisions related to the IMM and rules that would descope SDDTs from being granted IMM permissions (see the proposed amendments to Article 283 in Appendix 1 of CP13/24).

2.32 The PRA received no responses to these proposals and will implement them as set out in CP7/24 and CP13/24: see Annex G in the near-final rule instrument (Appendix 2).

Securities Financing Transactions and long settlement transactions

2.33 The PRA proposed to continue to apply capital requirements for Securities Financing Transactions (SFTs) and long settlement transactions to SDDTs but to amend Article 111(2) of the Credit Risk: Standardised Approach (CRR) Part of the near-final Basel 3.1 rules to say that an SDDT must determine the exposure value of SFTs and long settlement transactions in accordance with Chapter 3 of the Credit Risk Mitigation (CRR) Part. Those rule changes would mean that SDDTs would not be able to use a CCR method to determine exposures values of SFTs and long settlement transactions. The PRA made related proposals in CP13/24 (see the proposed amendments to Article 271 in Appendix 1 of CP13/24).

2.34 The PRA received no responses to these proposals and will implement them as set out in CP7/24 and CP13/24: see Annex I in the near-final rule instrument (Appendix 2).

Consequential changes to the Leverage Ratio and Large Exposures

2.35 The PRA proposed to simplify the derivatives exposure calculation for the Leverage Ratio (LR) and Large Exposure (LE) limit, so that SDDTs would not have to do the more complex calculations no longer required for Pillar 1 capital requirements (otherwise SDDTs would lose some of the benefits of those simplifications). The PRA received two responses to this proposal.

2.36 One respondent recommended minor clarificatory drafting changes to the proposed rules amending Article 390(4) of the Large Exposures (CRR) Part and Article 429(6)(b) of the Leverage Ratio (CRR) Part setting out a formula to be used by SDDTs to calculate the value of derivative exposures. It recommended that, in the definition of ‘current market value’ used in that formula, the PRA replace the word ‘transaction’ with ‘derivative contract’, to stay consistent with the lead-in language to the Articles, as well as the language used in CP7/24.

2.37 The PRA has decided not to follow this suggestion. The PRA considers that the use of 'transaction' captures the policy intention more clearly and precisely.

2.38 The respondent also made a recommendation in relation to Article 429c(6)(a) which sets out how institutions may use the simplified standardised approach for counterparty credit risk. It suggested the drafting explicitly make clear this is not applicable to SDDTs, as they must rely instead on the SDDT derivative calculation in Article 429c(6)(b). The PRA agrees that this recommendation would aid clarity and has accordingly changed the wording in Article 429c(6)(a) in the near-final rules.

2.39 Another respondent asked for clarification about the application of the new derivative exposure calculation for SDDTs. It asked if this calculation allows current market value of transactions with a single central counterparty (if covered by one agreement with the clearing member) to be assessed in aggregate at netting set level. Similarly, it queried if multiple derivative transactions with a single bilateral swap counterparty could be assessed on a net basis, provided that all transactions were covered by a single ISDA Master Agreement and Credit Support Annex.

2.40 The PRA would like to clarify that the approach proposed in CP7/24 applies the calculation separately to each transaction, with no netting permitted. Applying the derivative exposure calculation in this way avoids unneeded complexity and operational burden.

Consequential changes to credit risk

2.41 The PRA proposed to amend the rules in Article 132A of the Credit Risk: Standardised Approach (CRR) Part about how firms calculate capital requirements for exposures in the form of units or shares in collective investment undertakings (CIUs) to reflect the proposed changes to CCR and credit risk capital requirements for SDDTs. The proposed changes would avoid SDDTs having to use CCR rules to calculate exposure values for the purpose of the requirement to notify the PRA about the size of CIU exposures.

2.42 The PRA received no responses about this proposal and will implement it as set out CP7/24: see Annex I in the near-final rule instrument (Appendix 2).

Credit valuation adjustment risk

2.43 The PRA proposed that SDDTs would not need to calculate Pillar 1 capital requirements for CVA risk.

2.44 Four respondents supported the proposal.

2.45 The PRA welcomes these responses and will implement the proposal as set out in CP7/24: see Annexes J and V in the near-final rule instrument (Appendix 2).

Interactions with the Interim Capital Regime

2.46 In CP7/24, the PRA proposed to delete the ICR Pillar 1 capital requirements from the PRA rules when the SDDT capital measures are implemented. The PRA received no responses on this proposal.

2.47 As explained in Chapter 1, the PRA will not implement the ICR. See Chapter 8 for more details.

Other aspects of Pillar 1

2.48 The PRA proposed not to change other aspects of Pillar 1 for SDDTs. It highlighted that SDDTs would be in scope of the credit risk IRB approach, so that an SDDT that wishes to develop an IRB model and submit an IRB application according to the Basel 3.1 standards is able to do so. A firm would no longer meet the SDDT criteria only once it receives an IRB approval.^{footnote [17]} It also highlighted that the PRA was not proposing to change the Pillar 1 own funds requirements for SDDTs.^{footnote [18]}

2.49 One respondent argued that the PRA should develop a specific Pillar 1 framework for SDDTs which deviates from the Basel 3.1 standards, eg minimum capital requirements that are lower than the Basel standard of 8% of RWAs, which, it argued, would support economic growth. It pointed to other jurisdictions that apply lower minimum capital requirements to small, domestic-focused, banks.

2.50 After considering this response, the PRA has decided to maintain the proposal that it would not change Pillar 1 own funds requirements for SDDTs in the near-final policy. As set out in CP7/24, the PRA considers these requirements provide an appropriate level of safety and soundness for SDDTs. By supporting the resilience of SDDTs, the SDDT capital regime would promote stable and reliable financing to the UK economy by SDDTs, which would support UK economic growth. However, the PRA has identified the treatment of settlement risk as an element of Pillar 1 that could be simplified for SDDTs, since SDDTs have immaterial exposures to this risk, to complement the simplifications to Pillar 1 in the near-final policy. The PRA may consider proposing changes to the treatment of settlement risk in Pillar 1 – potentially with other, consequential, changes to prudential rules – for SDDTs in the future.

2.51 The PRA received no responses about any of the other aspects of Pillar 1 that it proposed to keep unchanged for SDDTs. The PRA will make no changes to those other aspects.

PRA objectives analysis

2.52 In Chapter 2 of CP7/24 the PRA set out why it considered the proposed Pillar 1 framework for SDDTs would advance the PRA’s objectives. The PRA considers this analysis remains valid.

‘Have regards’ analysis

2.53 In developing the near-final policy set out in this chapter, the PRA has had regard to its framework of regulatory principles.

2.54 In Chapter 2 of CP7/24 the PRA set out the regulatory principles it considered most material to the proposed Pillar 1 framework for SDDTs. The PRA considers this analysis remains valid subject to the following updates.

• Efficient and economic use of PRA resources (FSMA regulatory principles): the changes to the section about FX permissions in SoP2/23 will reduce the number of iterations of the SoP that the PRA needs to publish.

3: Pillar 2A

Introduction

3.1 This chapter provides feedback to responses to Chapter 3 of CP7/24, which set out the PRA’s proposals to simplify the Pillar 2A framework for SDDTs. This chapter also sets out the PRA’s near-final policy on the Pillar 2A framework for SDDTs following the consultation.

3.2 In CP7/24, the PRA proposed to introduce significant simplifications to the PRA’s Pillar 2 methodologies for SDDTs and to simplify how an SDDT is expected to assess risks in its Internal Capital Adequacy Assessment Process (ICAAP). In summary, the PRA proposed to:

• introduce substantial simplifications to the Pillar 2A approaches for credit risk, CCoR and operational risk for SDDTs;
• retain the existing Pillar 2A approach for interest rate risk in the banking book (IRRBB) with some clarifications, pension obligation risk, and counterparty credit risk for SDDTs;
• remove Pillar 2A methodologies and expectations for market risk and group risk for SDDTs; and
• eliminate the complex Pillar 2A adjustment for SDDTs in relation to the CCyB, in addition to the retirement of the refined methodology as set out in PS18/25.

3.3 The PRA received 15 responses to its proposals on the Pillar 2A framework for SDDTs. Responses covered a wide range of the PRA’s proposals. Comments focused particularly on the following points:

• the proposed detailed assessment for Pillar 2A credit risk;
• the proposed calculation for the Pillar 2A CCoR base add-ons for wholesale exposures;
• the proposed bucketing approach for assigning SDDTs’ Pillar 2A operational risk add-ons; and
• the proposed retirement of the refined methodology.

3.4 Having considered the responses to the consultation, the PRA has decided to make significant changes to the near-final policy. This chapter describes these changes.

The most material changes to the policy proposed in CP7/24 include:

• Removing the bucketing approach for operational risk. In CP7/24, the PRA proposed to use a bucketing approach to determine the level of Pillar 2A add-ons that SDDTs would be required to meet. The PRA has considered the consultation responses and decided not to implement the bucketing approach and instead align the methodology for SDDTs with that for non-SDDTs. In line with the current practice, an SDDT’s firm-specific add-on would be informed by the firm’s scenario analysis, alongside supervisory judgment and assessment of the firm’s risk profile.
• Making minor amendments to the calculation of the Pillar 2A CCoR wholesale add-on and committing to a further review. In CP7/24, the PRA proposed a simpler calculation of CCoR composed of a retail and wholesale base add-ons. Having considered the consultation responses, SoP5/25 excludes eligible covered bonds from the CCoR base add-ons to align the treatment with that of similar exposures. The PRA has also carefully considered the responses received on the treatment of small and medium-sized enterprise (SME) exposures and considers there is merit to the argument that SME portfolios would typically have lower single-name concentration. However, were the PRA to lower the add-ons for SME exposures, add-ons for another area of CCoR would have to be increased to ensure the CCoR add-ons remained broadly similar in aggregate. Instead, the PRA intends to review its approach to CCoR for all firms in Phase 2 of the Pillar 2A review, which the PRA currently plans to consult on in 2027. As part of this review, the PRA will consider the responses about the SDDT CCoR methodology, including the approach to SMEs, and consider whether further amendments may be appropriate.
• Amending the proposed Pillar 2A CCoR approach to single-name concentration monitoring (ie cluster limit) to improve risk sensitivity and transparency for firms. CP7/24 proposed a 300% of Tier 1 capital cluster limit which the PRA would use as a trigger for supervisory engagement. SoP5/25 excludes exposures to credit institutions from the cluster limit calculation and correspondingly tightens the limit to 200%.

3.5 The appendices to this near-final PS contain the PRA’s near-final policy which will introduce:

• a new SoP5/25 – The PRA’s methodologies for setting Pillar 2 capital for Small Domestic Deposit Takers (SDDTs) (Appendix 5);
• a new SS4/25 – The Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review and Evaluation Process (SREP) for Small Domestic Deposit Takers (SDDTs) (Appendix 6).

3.6 Further detail on the responses and the near-final policy is provided in the sections below. These sections are structured broadly along the same lines as Chapter 3 of CP7/24. Reporting changes arising from the near-final policy in this chapter (for which the proposals were set out in Chapter 7 of CP7/24) are discussed in Chapter 7 of this near-final PS.

3.7 Updates to SoP5/25 and SS4/25 are currently undergoing separate consultation under CP12/25: (a) proposed changes to the pension obligation risk section in both documents; and (b) consequential updates to SS4/25 which address the post-Basel 3.1 eligibility of guarantees and credit derivatives as credit risk mitigation in Pillar 1 of a firm’s capital requirements.^{footnote [19]} This consultation has not yet been finalised as of the publication date of this near-final PS.

Pillar 2A general approach

3.8 Two respondents commented on the proposed general approach to Pillar 2A. One of the respondents was supportive of the proposals, noting that they offer some operational simplifications for firms. The other respondent argued that the proposals would introduce a large degree of flexibility for the PRA to apply supervisory judgement, which could in turn increase ambiguity and reduce transparency for SDDTs. The respondent considered this to be particularly the case for the operational risk proposals, suggesting that the PRA should set out high-level principles for SDDTs to follow, to reduce uncertainty.

3.9 The PRA has decided not to publish high-level principles on Pillar 2A, noting that SS4/25 sets out expectations for SDDTs. The PRA considers its decision to not proceed with the proposed bucketing approach to operational risk for SDDTs should help to reduce uncertainty around those proposals.

3.10 Three respondents commented on updating the Pillar 2A requirement between SREPs. One of the respondents recommended the PRA conducts an out-of-cycle review for firms that have implemented mechanisms to mitigate their pension risk. The other respondents suggested the PRA should adjust its approach to setting capital add-ons that may not be reviewed again until the next SREP. For example, the PRA could update pension and/or IRRBB add-ons between SREPs, with the board potentially certifying changes to the PRA.

3.11 The PRA has decided not to amend its approach to updating Pillar 2A requirements. In line with the existing approach, the PRA may conduct off-cycle Capital Supervisory Review and Evaluation Process (C-SREP) assessments in certain exceptional circumstances, for example in cases where material developments or findings relating to a firm impacts the accuracy or appropriateness of the PRA’s previously set capital requirements. The PRA considers that this approach to be balanced and proportionate in ensuring a firm’s capital requirements remain aligned with evolving risk profiles, while making effective use of supervisory resources.

Credit Risk

3.12 In CP7/24, the PRA proposed to simplify the Pillar 2A methodology for credit risk as follows:

• remove the use of, and reliance on, the benchmarking methodology and therefore also remove the requirements to submit FSA076 and FSA077 (see Chapter 7 for details on the reporting changes);
• expect only SDDTs that meet certain criteria – those that are new and growing banks, predominantly engaged in unsecured retail lending or engaged in higher risk lending – to provide a detailed assessment of capital needed in relation to credit risk; and
• use credit scenarios as the core methodology for SDDTs that need to undertake a detailed assessment.

3.13 The PRA proposed that SDDTs meeting the above criteria should design their own credit scenarios, which should focus on high-severity tail events over a 12-month horizon, with particular focus on how these events may result in credit losses for higher risk lending which is not captured under Pillar 1. The PRA proposed that these scenarios should be more severe than the non-cyclical stress test scenarios the PRA proposed to publish for SDDTs to use as a template and severity benchmark for their ICAAP stress test.^{footnote [20]} The PRA also proposed to set out in SS4/25 expectations on SDDTs in conducting these scenarios. The PRA also proposed to provide an option for SDDTs to conduct the assessment using proxy IRB models in exceptional cases.

3.14 The PRA received five responses to its proposals to simplify the Pillar 2A methodology for credit risk. Respondents were generally supportive of the PRA’s proposals, in particular the proposal that only SDDTs that meet certain criteria should undertake a detailed assessment of capital needed in relation to credit risk.

3.15 Respondents requested clarity on the following:

• which SDDTs are in scope of the expectation to undertake a detailed assessment (specifically, the definition of ‘higher risk lending’);
• the severity of credit scenarios;
• whether credit scenarios should focus on higher-risk portfolios or the entire balance sheet; and
• whether immaterial portfolios were in scope of credit scenarios.

SDDTs in scope of providing a detailed assessment

3.16 Three respondents welcomed the PRA’s proposals that only SDDTs that meet certain criteria would be expected to undertake a detailed assessment of capital needed in relation to credit risk. Three respondents requested that the PRA clarify which firms were in scope of a detailed assessment, specifically requesting further clarity on the term ‘higher risk lending’. One respondent explained that greater clarity in this definition would result in improved consistency among firms in what is being included in their ICAAP and would provide greater certainty that SDDTs were meeting the PRA’s expectations.

3.17 Having considered the responses, the PRA has amended its criteria for which SDDTs are expected to provide a detailed assessment of capital needed in relation to credit risk. The updated criteria, as set out in SoP5/25 and SS4/25, are as follows:

• new and growing banks as defined under SS3/21 – Non-systemic UK banks: The Prudential Regulation Authority’s approach to new and growing banks;
• predominantly engaged in unsecured retail lending; or
• engaged in other bespoke or non-standard lending where additional capital may be required to ensure the firm is capitalised appropriately.

3.18 The PRA has also provided non-exhaustive examples in SS4/25 of what it considers to be bespoke or non-standard lending. This is lending that has characteristics that may not be well captured under Pillar 1, such as high variance in the rate of default or lending to niche markets, and as such require a detailed assessment in Pillar 2A to ensure a firm’s capital requirement remains appropriate for the riskiness of its portfolio. The PRA notes that the inclusion of new products as an example of bespoke or non-standard lending is to ensure that lenders understand and manage the idiosyncratic risks posed by this lending, which may not be captured by the Pillar 1 standardised approach to credit risk, and support innovation in the medium term by ensuring it is adequately capitalised for.

3.19 The PRA has clarified in SS4/25 that SDDTs that consider their bespoke or non-standard lending portfolios to be immaterial are not expected to undertake a detailed assessment, unless that lending is cumulatively material. The PRA notes that a firm may not necessarily receive a capital add-on for bespoke or non-standard exposures, provided a firm can substantiate its Pillar 1 capital requirement is adequate.

3.20 The PRA has also clarified in SS4/25 and SoP5/25 that the criteria for which SDDTs are expected to provide a detailed assessment is not exhaustive, and that it may therefore request an SDDT that does not meet the criteria to undertake a detailed assessment where it deems the firm to be at risk of being undercapitalised. The PRA has further clarified in SS4/25 that it expects an SDDT which does not meet the criteria, but considers that its credit risk may not be sufficiently capitalised under Pillar 1, to undertake a detailed assessment as part of its ICAAP.

Guidance on credit scenarios

3.21 In CP7/24, the PRA proposed that SDDTs in scope of the expectation to undertake a detailed assessment for credit risk as part of their ICAAP (and any others that consider it appropriate) should make use of credit scenarios as the core methodology to assess their exposure to credit risk.

3.22 Two respondents requested that the PRA clarify whether firms undertaking credit scenarios should assess their entire portfolio, or only exposures deemed high risk. One of these respondents requested that the PRA permit firms to exclude immaterial portfolios from their credit scenario assessments.

3.23 Having considered the responses, the PRA has amended SS4/25 to state that a firm undertaking a credit scenario is expected to consider its Pillar 1 capital adequacy across its entire portfolio, excluding portfolios that are deemed immaterial. The PRA observes that currently, when firms run credit scenarios on their lending portfolios, a whole balance sheet view is taken on whether the firm requires additional Pillar 2A capital, so that any inadequacies in Pillar 1 as a whole can be addressed in Pillar 2.

3.24 The PRA considers that a whole balance sheet assessment will aid the comparability of ICAAP documents between SDDTs and those firms outside the regime, ensuring that risks are measured and supervised consistently across all firms. The PRA notes some firms net off excess conservatism, inherent in some aspects of the standardised approach, to credit risk with under-capitalisation identified in their credit scenarios. The PRA will continue to allow firms to take a whole balance sheet assessment that allows netting across different credit portfolios when assessing whether credit risk exposures are adequately capitalised. However, the PRA will only consider this appropriate if firms can substantiate the idiosyncratic factors in their portfolios that give rise to excess conservatism.

3.25 The PRA has excluded those portfolios that are considered to be immaterial. The PRA considers that the potential undercapitalisation of immaterial portfolios is likely to be minimal and understands that it may be difficult to predict how these portfolios behave in a stress, given their size. The PRA has updated SS4/25 to explain that firms should include information on the portfolios considered immaterial, and the rationale for excluding these from credit scenario analysis, in the ICAAP document.

3.26 In CP7/24, the PRA proposed that SDDTs should ensure their own credit scenarios are more severe than the stress test scenarios for SDDTs that would be published by the PRA. Two respondents requested further guidance on the severity of the scenario and one respondent stated that the PRA publication of an appropriately calibrated scenario would help firms to understand this.

3.27 Having considered the responses, the PRA has sought to provide additional clarity by publishing an example of the stress test scenarios (see Appendix 16). This will help SDDTs and firms considering becoming SDDTs to better understand the severity of the scenarios and how the type and characteristics of their business models could impact the results of the stress testing assessment. The PRA notes that the purpose of the Pillar 2A assessment is to capture any under-capitalisation in Pillar 1 with the aim of ensuring minimum requirements provide sufficient capacity to absorb losses in high-severity tail events over a 12-month horizon. The PRA has updated SS4/25 to explain that the Pillar 2A assessment is more severe than – and different from – Pillar 2B, which ensures firms can maintain sufficient capital to withstand a severe but plausible stress over a longer time horizon. SDDTs should consider this when calibrating the uplift in severity of their credit scenarios relative to the published stress test scenarios for SDDTs.

3.28 The PRA has also made some minor amendments to the text in SS4/25 to clarify its expectations in relation to the use of proxy IRB models as an alternative to the use of credit scenarios.

Other responses received in relation to credit risk

3.29 The PRA received three responses on its proposal to remove the use of the IRB benchmarking methodology. One respondent was supportive of the PRA’s proposal, while another requested that the PRA continue to publish the IRB benchmarks, arguing firms would find them helpful when conducting their ICAAPs. One respondent stated that the removal of the benchmarking methodology and the retirement of the refined methodology would mean that SDDTs might not be able to net off excess capital held against lower risk portfolios, potentially leading to an increase in the Pillar 2A add-on for credit risk.

3.30 Having considered the responses, the PRA has decided to maintain its proposal. The PRA considers the benchmarking methodology to no longer be an appropriate approach of assessing potential credit risk under-estimation in the standardised approach for SDDTs, as the implementation of the Basel 3.1 standards will improve the risk capture and sensitivity of the standardised approach to credit risk. The PRA also considers that the implementation of the Basel 3.1 standards, and in particular the introduction of the output floor, will make it unviable to maintain IRB benchmarks. The output floor aims to address shortcomings in the use of internal models, reinforcing the PRA’s view that IRB risk weights may not always be an appropriate comparator. The removal of IRB modelling for certain asset classes will eliminate the data required to update some of the benchmarks. Updating the IRB benchmarks would also create a cost to firms using the IRB approach that would be disproportionate to the benefits, unnecessarily increasing the burden on firms.

3.31 The PRA is also retiring the refined methodology as set out in PS18/25. The PRA considers that the expectation on firms in scope of the detailed assessment to undertake a whole balance sheet assessment in their credit scenarios ensures that firms are holding a proportionate amount of capital.

3.32 One respondent requested that the PRA clarifies that SDDTs can comply with the ICAA rules through other risk management activities, to avoid SDDTs conducting unnecessary analysis in their ICAAPs.

3.33 The PRA notes that only some SDDTs will be expected to provide a detailed credit assessment in the ICAAP and has clarified the criteria for this in SS4/25. However, SDDTs are required to take responsibility for ensuring that the capital they maintain is adequate given their balance sheet risks, with the ICAAP being an integral part of meeting this requirement. The PRA considers it would therefore be contradictory to provide specific expectations relating to risk management activities. The PRA notes that its ICAA rules state that the ICAAP must be conducted in a way that is proportionate to the nature, scale, and complexity of a firm’s activities.

3.34 One respondent asked whether the Pillar 2A add-on would be set as a percentage of risk weighted assets for closed higher risk portfolios. The PRA confirms that, in line with the current approach, add-ons will be set as a percentage of a firm’s total risk weighted assets.

Credit concentration risk

3.35 In CP7/24, the PRA proposed the following changes to simplify the current Pillar 2A methodology for CCoR for SDDTs:

• to replace the Herfindahl-Hirschman Index (HHI) methodology with a simpler calculation of CCoR composed of a base add-on for CCoR, with separate components for retail and wholesale; and
• to supplement this approach by periodic evaluation of single-name and sector concentration risks, using data from the existing Large Exposure and stress testing frameworks respectively.

3.36 The PRA received nine responses to its proposals for simplifying the Pillar 2A CCoR methodology for SDDTs, eight of which commented on the base add-on proposal, four of which commented on the supplementary single-name risk proposal, and two of which commented on the supplementary sectoral risk proposal.

Revisions to calculating Pillar 2A capital for credit concentration risk

3.37 The PRA proposed to set Pillar 2A CCoR add-ons based on wholesale exposures (‘wholesale add-on’) and retail exposures other than those included in standardised approach residential mortgage portfolios (‘retail add-on’). Under this proposal, the wholesale add-on would be calibrated to include risks from single-name, sector, and geographic concentration. The retail add-on would only cover geographic concentration risk, given the lower relevance of single-name and sector concentration risk to retail portfolios.

Approach to calculating base add-ons

3.38 Five respondents welcomed the PRA’s proposal to simplify the Pillar 2A CCoR methodology. Four respondents supported the proposal to remove the existing HHI methodology, noting the complexities and burden surrounding it. One respondent was in favour of not applying the proposed retail add-on to residential mortgages.

3.39 Three of the respondents that welcomed the simplification also argued that the proposed approach to calculating the base add-ons was too simplistic and that setting a flat add-on per exposure class did not capture firm-specific concentration risk.

3.40 Having considered these responses, the PRA has decided to maintain in the near-final policy its proposal to replace the existing HHI methodology with a more proportionate methodology for calculating CCoR for SDDTs. The PRA considers the simplification benefits of the flat add-ons outweigh the reduction in risk sensitivity. The reduction in risk sensitivity is mitigated by the supplementary sectoral and single-name assessments (see paragraphs 3.63-3.72 below). The intention of these assessments is to supplement the base add-ons and achieve the right balance between simplicity and risk sensitivity.

Calibration of CCoR base add-ons

3.41 Two respondents stated that the proposed level of the wholesale add-on was too high. Both respondents requested evidence to justify the proposed level, as well as an explanation for why the wholesale add-on was substantively higher than the retail add-on. One respondent argued the proposals should be amended in light of the retirement of the refined methodology to avoid large increases to Pillar 2A add-ons that would be set for firms.

3.42 Having considered these responses, the PRA has not changed the calibration of either the wholesale or retail add-on in the near-final policy. As stated in CP7/24, the new approach does not reflect a change in PRA’s risk appetite or view on CCoR for SDDTs. The PRA’s estimates of SDDT-eligible firms’ add-ons are in aggregate broadly similar to the existing CCoR add-ons for these firms, which would be representative of the add-ons these firms would face outside the SDDT regime.^{footnote [21]} Using 2024 Q4 data, the PRA estimates that the weighted average CCoR base add-on for SDDT-eligible firms under the near-final policy would be 1.22% of RWAs, slightly below the 1.4% of RWAs under the existing CCoR methodology.

3.43 The PRA also assesses that the difference between the retail and wholesale add-ons is appropriate according to the estimated firm-by-firm impacts shown below. Chart 1 shows that for SDDT-eligible firms for which wholesale exposures represent less than half of their credit RWAs, the median impact on CCoR add-ons is expected to be capital neutral. In comparison, lenders which have a larger share of wholesale exposures are likely to see a slight reduction, on average, which may be further supplemented by the proposed approaches to single-name and sectoral concentration.

Chart 1: Comparison of estimated CCoR base add-ons under the near-final policy with existing CCoR add-ons ^(a)(b)

Exposures subject to wholesale add-on

3.44 In CP7/24, the PRA defined wholesale exposures with reference to SDDTs’ Pillar 1 reporting and definitions to calculate the base add-ons. As such the PRA proposed no new reporting requirements and to remove the existing Pillar 2A CCoR reporting templates for SDDTs, as outlined in paragraph 7.31 of CP7/24, to minimise burden on firms.

3.45 Five respondents suggested amendments to the wholesale definition for several exposure classes. These included amendments to the treatment of SME exposures, ‘other items’, equity, and eligible covered bonds. Respondents argued that the application of the wholesale CCoR add-on to these exposures was not justified and a lower add-on for these exposures should be applied instead. These responses are discussed in greater detail below.

SME exposures

3.46 Three respondents suggested that the 3.5% base add-on was too high for SME exposures. They argued that it is not appropriate to treat SME exposures in the same manner as more concentrated large corporate exposures and that the proposal could result in higher add-ons for SME lending than under the existing methodology.

3.47 The PRA considers there is some merit to these responses as it considers SME portfolios would typically have lower single-name concentration than less granular wholesale exposures, while still having similar levels of sectoral concentration.

3.48 However, as noted above, the PRA estimates add-ons for SDDT-eligible firms under the CP7/24 proposals are in aggregate broadly similar to the existing CCoR add-ons. Therefore, absent other changes to the SDDT capital regime, lower CCoR add-ons for SME exposures would lower capital requirements, in aggregate, for SDDTs. In order to ensure the add-ons remained broadly similar in aggregate, add-ons for another area of CCoR, such as the overall wholesale add-on, would have to be increased. On balance, the PRA has decided not to change the treatment of SME exposures at this time. Instead, the PRA intends to consider the treatment of SME exposures as part of a fuller review of CCoR (for both SDDTs and non-SDDTs) in Phase 2 of the Pillar 2A review, which it currently plans to consult on in 2027. This review will consider the approach to Pillar 2A requirements for CCoR for all firms. As part of this review, the PRA will be able to assess the appropriate treatment for exposures inside and outside the SDDT regime together.

3.49 Two respondents argued that there was an inconsistency in the CCoR methodology proposed in CP7/24. This was that an unsecured loan to an SME would receive the retail add-on if below the threshold of £880,000, but if it was secured on trading premises it would become ‘commercial real estate' and thus receive the higher wholesale add-on.

3.50 The PRA acknowledges this disparity but considers it is not proportionate to amend the CCoR methodology. A breakdown between secured SME exposures by counterparty, which would identify real estate exposures that would otherwise meet the retail definition, is not available in SDDTs’ Pillar 1 reporting. Thus, to distinguish between secured SME exposures in the CCoR methodology, additional reporting requirements that would provide that breakdown would have to be imposed on all SDDTs. Given the PRA intends to review the treatment of SME exposures as part of the Phase 2 of the Pillar 2A review anyway, the PRA has decided not to amend reporting requirements to avoid potential added complexity for SDDTs.

3.51 One respondent argued the £880,000 retail threshold (which defines which exposures qualify for the retail treatment under Pillar 1) should be increased to £1.6 million in line with inflation as it considered the threshold for classifying retail exposures had not been updated since 2004. The respondent proposed that PRA commit to review the threshold to ensure it is indexed in line with inflation. The PRA will maintain the proposed CCoR treatment in the near-final policy to maintain alignment with the Pillar 1 regime (which is to apply the Basel 3.1 standardised approach to credit risk to SDDTs for the reasons discussed in paragraphs 2.11 and 2.12 in Chapter 2), as well as avoiding additional complexity and reporting burden, which would go against the aim of the Strong and Simple Framework. As has been noted previously, the PRA is considering an approach to indexing thresholds in the prudential framework.^{footnote [22]}

‘Other items’

3.52 Four respondents argued that the ‘other items’ exposure class should be exempted from the CCoR add-ons as it is primarily composed of tangible fixed assets which have no counterparty to give rise to single-name, sectoral, or geographic concentration risk. They argued that not exempting ‘other items’ from the wholesale add-on would result in higher add-ons than firms would face outside the SDDT regime.

3.53 Having considered these responses, the PRA has decided not to change the treatment of ‘other items’ in the near-final policy. While fixed assets would typically not give rise to CCoR, the ‘other items’ category captures a range of exposures, and the PRA was not persuaded by the evidence that these exposures could not give rise to CCoR. However, if the CCoR methodology for SDDTs was to distinguish between the different types of ‘other items’, the PRA would have to introduce additional reporting requirements for SDDTs that provided a breakdown of ‘other items’. Additionally, excluding ‘other items’ from CCoR add-ons would have a material impact on the calibration of CCoR add-ons, necessitating a corresponding increase, such as to the level of the wholesale add-on, in order to maintain the resilience of SDDTs. In summary, the PRA has not excluded ‘other items’ from the exposures receiving CCoR add-ons in the near-final policy because of the costs of increasing reporting burden and the wholesale add-on.

Eligible covered bonds

3.54 Two respondents argued that eligible covered bonds should be exempted from CCoR add-ons to be consistent with the treatment of exposures to institutions and regulatory residential real estate.

3.55 The PRA considers it would be appropriate to exempt eligible covered bonds from the CCoR base add-ons for the arguments given by the respondents. This is reflected in SoP5/25. The PRA considers this change will not have a material implication on the calibration of the CCoR add-ons in aggregate, given SDDTs’ exposures to eligible covered bonds are relatively small.

Equity exposures

3.56 Two respondents argued that equity exposures should be exempted from CCoR add-ons because the CCoR methodology should only capture lending portfolios.

3.57 Having considered these responses, the PRA has decided to continue to apply the wholesale add-on to equity exposures under the near-final policy. The PRA considers the responses provided no substantive arguments to justify why SDDTs would not face risks from sectoral, single-name, or geographic concentration from their equity exposures.

Additional amendments to the base add-ons

3.58 Reflecting on the responses that requested the CCoR methodology for SDDTs to be more risk sensitive and not disadvantage SDDTs versus outside the regime, the PRA has decided to make two further minor amendments to the CCoR base add-ons in the near-final policy. The PRA has amended the treatment of securitisations by applying the retail, rather than the wholesale, add-on to these exposures. This change aligns the treatment more closely with the existing CCoR methodology, in which securitisations are not considered for single-name concentration or sectoral concentration if the underlying exposures are retail in nature.

3.59 Secondly, in addition to exempting exposures in default from receiving CCoR add-ons, as proposed in CP7/24, the PRA has extended the exemption to defaulted exposures in the following two exposure classes: i) exposures associated with particular high risk; and ii) subordinated debt, equity and other own funds instruments, which are reported separately from exposures in default. This is in line with the treatment under the existing CCoR methodology, which excludes all defaulted assets. The changes can be found in SoP5/25.

3.60. The PRA assesses that these changes will improve risk sensitivity and increase the alignment with the treatment outside the SDDT regime, while not having a material impact on the aggregate calibration given the SDDTs’ limited exposures to these items.

Other comments

3.61 One respondent requested a summary table of the exposure classes for which the retail or wholesale add-on would apply to aid clarity. The PRA has produced a summary table (Table 1 in SoP5/25) that outlines which exposures are subject to the wholesale and retail add-ons and which exposures are exempt from the base add-ons.

Summary of amendments to CCoR base add-ons

3.62 To summarise, the PRA has made the following changes to the CCoR base add-ons in its near-final policy. It has amended the treatment of the following exposures, which were subject to the wholesale add-on in the proposals in CP7/24, by exempting them from the base add-ons:

• Eligible covered bonds (OF 07.00S: eligible covered bonds – R0010C0220)
• Defaulted subordinated debt, equity and other own funds instruments (OF 07.00S: subordinated debt, equity and other own funds instruments – R0015C0220)
• Defaulted exposures associated with particular high risk (OF 07.00S: exposures associated with particular high risk – R0015C0220)

And reclassified the following exposure so it receives retail add-on rather than the wholesale add-on:

• Securitisations (OF 02.00S – R0470C0010)

Review of single-name and sector concentration risks

3.63 As there may be SDDTs with single-name and sector concentration risks that are not fully reflected in the proposed CCoR base add-ons, the PRA proposed, as a supplementary approach, to periodically evaluate these risks using data from the existing Large Exposures and stress testing frameworks respectively. The intention with these measures is for them to act as guardrails to the base add-ons and achieve the right balance between simplicity and risk sensitivity.

Single-name concentration

3.64 In CP7/24, the PRA proposed to monitor single-name concentration using existing Large Exposure (LE) reporting and engage with an SDDT for which the sum of its LEs^{footnote [23]} (ie its ‘cluster ratio’) is above 300% of its Tier 1 capital (ie the cluster limit).

3.65 Two respondents supported the proposal to monitor risks from single-name concentration. One respondent expressed concerns that the cluster limit would negatively affect challenger banks with small capital bases and relatively large loans. This respondent requested further details on the implications of exceeding the cluster limit. It also suggested that the PRA should adjust the threshold for including exposures in the cluster limit, for instance to only count LEs if they are above 20% of a firm’s Tier 1 capital.

3.66 Two respondents requested clarity on the types of exposures that would be subject to the cluster limit, specifically whether exposures exempt from the LE limit (eg sovereigns) would be also exempt from the cluster limit. One respondent requested clarification on how credit risk mitigation should be taken into account.

3.67 Two respondents suggested that in light of the proposals in CP14/24, the 300% limit should be raised if the residential property exemption is removed from the LE regime.^{footnote [24]} They considered that if a large exposure is secured on residential property with a low loan-to-value ratio, it should not warrant additional engagement from the PRA, with one of the respondents arguing that the residential property exemption should be retained in the LE regime. One respondent to CP14/24 made similar remarks, suggesting the PRA consider whether the 300% limit should be raised given the proposals in CP14/24.

3.68 Having considered these responses, the PRA has amended the cluster limit in the near-final policy to exclude exposures to credit institutions from among the exposures subject to the cluster limit and correspondingly tighten the limit from 300% to 200%. The PRA considers these changes would mean the cluster ratio more accurately measures single-name concentration risk, and in a way that is more similar to how the PRA currently considers single-name concentration risk for small firms in the existing CCoR methodology. By making the near-final policy more risk sensitive, the PRA considers these changes would make any potential supervisory engagement with SDDTs about single-name concentration risk more relevant and proportionate. Furthermore, the PRA assesses that a similarly low number of SDDT-eligible firms would be above the cluster limit under the near-final policy as there would be under the CP7/24 proposals.

3.69 The PRA has decided not to provide further guidance on the circumstances when an additional add-on to an SDDT that exceeds the cluster limit may be applied. However, as highlighted in CP7/24, the PRA would engage with an SDDT before an add-on was considered, as explained in paragraph 4.8 of SoP5/25. In a case where the cluster limit is exceeded, the PRA would reflect on additional factors, such as the nature and risk profile of the exposures to which the SDDT has significant large exposures or the extent to which the SDDT has exceeded the limit.

3.70 The PRA has further clarified how the cluster limit is assessed in SoP5/25. As stated in CP7/24, the cluster limit makes use of LE reporting as defined in the Large Exposures (CRR) Part of the PRA Rulebook. For the purpose of calculating the cluster ratio, in addition to excluding exposures to credit institutions, the same exemptions as in the LE framework also apply.^{footnote [25]} Similarly, net exposures are used after taking into account the effect of credit risk mitigation in accordance with Articles 399 to 403 of the Large Exposures (CRR) Part of the PRA Rulebook, including any changes made in PS14/25 (following CP14/24) or thereafter. The PRA has re-assessed the impacts and does not expect the policy finalised in PS14/25 to significantly alter the number of firms that would surpass the cluster limit, particularly with the exclusion of exposures to credit institutions.

Sector concentration

3.71 In CP7/24, the PRA proposed a supplementary review of sector concentration, which was based on an existing expectation for firms (in paragraph 3.13 in SS31/15). The PRA proposed that for SDDTs with significant wholesale exposures, the PRA would review how any sectoral concentration is reflected in the design of these stress test scenarios as part of the C-SREP. The purpose is to ensure firms have sufficiently explored how their sectoral concentrations could crystallise losses in a severe but plausible stress.

3.72 Two respondents supported the proposed supplementary approach to sector concentration, with one of those respondents requesting that the PRA provide more detail on what it considers to be ‘significant wholesale exposures’. After considering this response, the PRA has decided not to provide more detail. The PRA considers wholesale to be a well-defined term and does not wish to set a specific threshold to define ‘significant’. Instead, the PRA expects firms to consider the degree of their sectoral concentration, manage this risk prudently and proportionately reflect this in their stress scenarios if appropriate. The PRA has made a minor addition to SS4/25 to make this expectation more prominent in paragraph 3.13 in the stress test scenario section of Chapter 3 of the SS.

Operational Risk

3.73 In CP7/24, the PRA proposed changes to articulate and streamline the methodology for setting operational risk Pillar 2A capital for SDDTs. The PRA proposed that it would use an SDDT’s ICAAP to allocate it to one of three buckets, relating to its broad level of risk, which in combination with the firm’s Pillar 1 operational risk requirement would then determine the level of Pillar 2A add-ons that the SDDT would be required to meet. Each of the buckets would have a corresponding total operational risk capital requirement (Pillar 1 plus Pillar 2A) expressed as a share of the firm’s total assets.

3.74 The PRA also proposed to introduce clearer and more proportionate expectations for SDDTs undertaking their own Pillar 2A operational risk assessment. The PRA proposed to set an expectation that all SDDTs should provide in their ICAAP document some operational risk scenario analysis, as well as information on their management of operational risk and any available data the firm has on any recent loss events and/or any expected losses in the next year.

The PRA’s bucketing approach to operational risk capital

3.75 The PRA received 14 responses regarding its proposals on Pillar 2A operational risk. The majority of the responses were not supportive of the proposed bucketing approach as a basis for the operational risk assessment. The PRA received the following responses to its proposals:

• 12 respondents argued that the bucketing approach would create uncertainty regarding the PRA’s allocation of firms to buckets;
• 10 respondents commented on the large differences between the buckets’ capital requirements that could create ‘cliff-edges’ for firms moving between buckets;
• six respondents argued against the use of total assets as a basis for the operational risk requirements; and
• four respondents argued that the bucketing approach would increase capital requirements relative to outside the SDDT regime.

3.76 Respondents outlined the impact the concerns listed above could have on firms and the SDDT regime. Four respondents raised the concern that the proposed bucketing approach to operational risk would deter firms from entering the SDDT regime. Five respondents stressed that the uncertainty about bucket allocation would cause firms to hold additional management buffers to account for the risk of their bucket changing. Three respondents made the overarching point that the proposed approach would give no simplification for firms, as SDDTs would still conduct operational risk scenario analysis as per the current regime.

3.77 Respondents put forward a variety of suggestions for changing the proposed approach. Six respondents requested the PRA include extra buckets to reduce the large step-changes in capital requirements between the buckets or scaled add-ons within bucket ranges. Six respondents suggested the PRA should give firms supervisory assistance when moving between buckets, such as providing a transitional period for firms to raise additional capital. Three respondents recommended that the PRA discard the bucketing approach entirely and align the operational risk methodology for SDDTs with the methodology for Pillar 2A operational risk for non-SDDTs.

3.78 Having considered the responses, the PRA has decided not to proceed with the bucketing approach for Pillar 2A operational risk. The PRA will instead align the methodology for SDDTs with that for non-SDDTs. In line with current practice, an SDDT’s add-on for operational risk would be informed by its scenario analysis, alongside supervisory judgment and assessment of the firm’s risk profile. This will help ensure that the add-ons are appropriately tailored to the specific risk level and enhances the relevance and proportionality of the capital requirements.

Firm operational risk scenario analysis and additional operational risk information from the ICAAP

3.79 Five respondents commented on the proposals in the proposed new SS4/25, including the use of scenario analysis to determine the Pillar 2A add-on for operational risk. Four respondents were in favour of using scenario analysis over the bucketing approach to determine the Pillar 2A add-on. One respondent supported the clearer and more proportionate expectations proposed by the PRA. One respondent strongly supported the use of scenario analysis as it could provide meaningful business risk insights and raise awareness regarding the potential for extreme operational risk events occurring. Two respondents expressed concern that the expectations around scenario analysis may not result in meaningful simplifications for SDDTs.

3.80 Having considered these responses, the PRA has decided to maintain its proposed clarifications in SS4/25. An SDDT will still be expected to conduct scenario analysis as part of its ICAAP, as proposed in CP7/24. CP7/24 proposed to introduce clearer and more proportionate expectations for SDDTs undertaking their own Pillar 2A operational risk assessment. This will enhance the transparency of the PRA’s policy approach and proportionality of requirements for SDDTs. The PRA considers that introducing expectations for scenario analysis (with a proportionality element) for SDDTs, along with enhancing transparency in SoP5/25, will provide greater clarity on areas SDDTs find challenging. These changes aim to simplify the operational risk methodology while making expectations clearer and more proportionate.

3.81 Separately, the PRA has published CP12/25 which proposed similar clarifications to operational risk policy materials for non-SDDTs, including enhanced transparency of the PRA’s methodology in SoP5/15 and introducing expectations on scenario analysis in SS31/15.

3.82 The PRA intends to publish the final policy documents for Phase 1 of the Pillar 2A review in 2026, ahead of implementation of both Basel 3.1 and the simplified capital regime for SDDTs on 1 January 2027. As part of that publication, the PRA will review responses on the clarifications and expectations proposed for non-significant firms^{footnote [26]} on operational risk as part of the Pillar 2A review (as set out in CP12/25). The PRA will also consider whether the SDDT policy documents would benefit from similar amendments/clarifications.

Other types of risk considered relevant for SDDTs

3.83 In CP7/24, the PRA proposed to retain the current approach to IRRBB for SDDTs, aligning it with the methodology and expectations set out in SoP5/15 and SS31/15. This includes incorporating the clarification and editorial changes (such as updating obsolete references) consulted on in CP9/24, which were aimed at enhancing clarity and transparency.

3.84 The PRA also proposed to retain the current approach to pension obligation risk. For greater clarity and transparency reasons, the PRA also proposed to update a reference to the PRA Rulebook in the pension obligation risk section in the proposed new SoP5/25.

3.85 The PRA received two responses on its proposed approach to IRRBB and pension obligation risk. One respondent was supportive of the proposed approach. The other respondent emphasised the importance of the PRA being transparent in its approach to IRRBB and pension obligation risk.

3.86 On pension obligation risk, the PRA reviewed its methodology and issued a separate consultation, CP12/25, which set out proposals to reduce regulatory burden on firms. These proposals are relevant to all firms, including SDDTs. Please refer to Chapter 4 of CP12/25 for more details. Subject to the outcome of CP12/25, the PRA intends to publish a policy statement in 2026 to finalise the relevant changes to SS4/25 and SoP5/25.

3.87 On IRRBB, the PRA is currently undertaking a review of its Pillar 2A methodology, which will be subject to a separate consultation. As set out in PS18/25, the PRA has decided not to implement the clarificatory changes proposed in CP9/24 at this time. These changes will be reconsidered as part of the ongoing review of the IRRBB methodology. Consequently, the PRA has amended paragraphs 5.3 and 5.5 of SoP5/25 to ensure alignment with SoP5/15.

3.88 On climate risk, one respondent noted that there is minimal guidance on what is considered proportionate for SDDTs for the assessment of financial risks from climate change. The PRA is currently consulting on an update to its guidance on managing climate-related risks in CP10/25 - Enhancing banks’ and insurers’ approaches to managing climate-related risks – Update to SS3/19. As outlined in paragraph 1.29 of CP10/25, the PRA recognises that firms of any size may be significantly exposed to climate-related risks. The impact of climate-related risks on a firm is driven by a range of factors, in particular the firm’s business model and the geographical concentration of its balance sheet, rather than just the size of the firm.

Types of risk considered generally not relevant for SDDTs

3.89 In CP7/24, the PRA proposed to not set specific methodologies or expectations relating to risks that it considered generally not relevant for SDDTs (eg group risk).

3.90 The PRA did not receive any responses on types of risk considered generally not relevant to SDDTs. As such, the PRA will implement the proposals set out in CP7/24, ie SoP5/25 and SS4/25 do not include specific methodologies and expectations related to these risks. To the extent that SDDTs are exposed to any of these risks, the PRA would continue to require SDDTs to ensure that they maintain adequate capital for these risks as part of their ICAAP.

Pillar 2A adjustments to the capital stack

3.91 In CP7/24, the PRA proposed to eliminate two complex Pillar 2A adjustments for SDDTs. One of these adjustments was the proposal to retire the refined methodology, which was being consulted on in CP9/24.

3.92 The PRA also proposed to remove the Pillar 2A adjustment that was applied following the FPC’s decision to increase the level of the UK CCyB rate in a standard risk environment from 1% to 2% (the ‘CCyB adjustment’), as set out in PS15/20 – Pillar 2A: Reconciling capital requirements and macroprudential buffers.

3.93 Two respondents noted that Pillar 2A requirements would increase for SDDTs given the removal of Pillar 2A adjustments and asked the PRA to consider the impacts of the proposals on the overall capital stack. One respondent asked the PRA to identify any further overlaps between requirements so these could be reflected in adjustments to the capital stack.

3.94 The PRA agrees Pillar 2A requirements may increase following the removal of the adjustments but assesses the overall impact on the ‘top of the stack’ is expected to be broadly neutral, if not beneficial, in aggregate (see Chart 2 in Chapter 9). Additionally, the simplified Pillar 2A methodologies should not lead to significantly different add-ons per risk stripe relative to the existing methodologies. The simplified Pillar 2A methodologies deliver a capital stack which is simpler and more transparent, without changing overall resilience.

3.95 Separately, two respondents requested more clarity on the SME lending adjustment implemented as part of Basel 3.1. The PRA has since published PS7/25 – Update to PS9/24 on the SME and infrastructure lending adjustments setting out details of its near-final policy for the SME and infrastructure lending adjustments (‘Pillar 2A lending adjustments’) for non-SDDTs. PS7/25 includes detail on the calculation formula, which involves multiplying two components – the change in RWAs arising from the removal of the support factors (ΔRWA)^{footnote [27]} and the capital adjustment factor (CAF).^{footnote [28]}

3.96 The PRA has decided that the Pillar 2A lending adjustments for SDDTs will follow the same approach as for non-SDDTs, as set out in PS7/25, except for the following changes the PRA has made to reflect differences in the SDDT capital regime:

• Removing aspects of the methodology for calculating ΔRWA that are not applicable to SDDTs (ie treatment of RWAs under the IRB and slotting approach, interactions with the output floor, and treatment of exposures where the parameter substitution method is used for credit risk mitigation); and
• Modifying the CAF formula to reflect the capital stack for SDDTs, which features a single capital buffer instead of multiple buffers. In particular:
  • For all SDDTs except new and growing banks,^{footnote [29]} the CAF formula for the Pillar 2A lending adjustments applied on the implementation date of the SDDT capital regime (1 January 2027) will cover the following components of the PRA’s capital stack: (i) Pillar 1 minimum total capital ratio; and (ii) the minimum value of the Single Capital Buffer (SCB) (ie 3.5% of RWAs); and
  • For SDDTs that are new and growing banks for purposes of the Pillar 2A lending adjustments to be applied on 1 January 2027 and for all SDDTs following 1 January 2027, the CAF formula will be adjusted to include an additional component: (iii) any relevant deductions related to the SCB.^{footnote [30]}

3.97 The PRA’s near-final methodology for setting the Pillar 2A lending adjustments for SDDTs, as well as the data templates and accompanying instructions required for their calculation, are set out in Chapter 11 and the appendices of SoP5/25.

3.98 The PRA will implement the Pillar 2A lending adjustments for SDDTs that submit the necessary data to the PRA. SDDTs do not need to submit the data templates if they do not want to apply either the SME lending adjustment or the infrastructure lending adjustment:

• For the Pillar 2A lending adjustments to be applied on the implementation date of the SDDT capital regime (1 January 2027), SDDTs will need to submit the completed data templates as part of the PRA’s data collection exercise for the off-cycle review of firm-specific Pillar 2 capital requirements. Details of this review will be communicated separately; and
• From 1 January 2027, SDDTs will need to return the data templates for the Pillar 2A lending adjustments alongside their ICAAP submissions as part of their C-SREPs.^{footnote [31]}

3.99 One respondent also queried whether firms have sufficient Pillar 2A capital to fully benefit from the Pillar 2A lending adjustments. Based on the PRA’s analysis of available data, all SDDT-eligible firms are estimated to have sufficient amounts of Pillar 2A requirements to fully benefit from the Pillar 2A lending adjustments. The PRA will further assess this through the data collection exercise for the off-cycle review of firm-specific Pillar 2 capital requirements.

Refined methodology

3.100 The PRA proposed in CP9/24 to retire the refined methodology to Pillar 2A for all firms, including SDDTs. As set out in CP7/24, the PRA would no longer apply the refined methodology to SDDTs since they would be subject to the Basel 3.1 standardised approach to credit risk. Eliminating this complex adjustment would contribute to making the capital stack simpler for SDDTs. It would also increase transparency.

3.101 The PRA received six responses to CP7/24 regarding the proposal to retire the refined methodology. One respondent was supportive of the proposal, highlighting that the size of the Pillar 2A adjustment that could be delivered by the refined methodology would be limited if it were retained. Five respondents were not supportive of the proposal, citing concerns such as the impact on firms’ capital requirements and the gap in risk weights between the standardised and IRB approach.

3.102 The PRA has considered these responses along with the responses to CP9/24 and has decided to maintain its proposal to retire the refined methodology. Given these responses pertain to the proposals set out in CP9/24, please refer to PS18/25 for the PRA’s feedback.

PRA objectives analysis

3.103 In Chapter 3 of CP7/24 the PRA set out why it considered the proposals to simplify the Pillar 2A framework for SDDTs would advance the PRA’s objectives. The PRA considers this analysis remains valid subject to the following updates.

3.104 The amendments to the near-final policy on the CCoR single-name cluster limit increase risk sensitivity and thus further advance the PRA’s primary objective, without compromising on simplicity or increasing regulatory burden.

3.105 The PRA also considers that not proceeding with the bucketing approach for operational risk strikes an appropriate balance between simplification and comparability. Having a consistent and comparable Pillar 2A operational risk assessment framework across both SDDTs and non-SDDTs would facilitate effective competition. This consistency also helps reduce the barriers to entry and to exit from the SDDT regime, promoting a more level-playing field for firms of varying sizes and business models.

‘Have regards’ analysis

3.106 In developing the near-final policy set out in this chapter, the PRA has had regard to its framework of regulatory principles.

3.107 In Chapter 3 of CP7/24 the PRA set out the regulatory principles it considered most material to the proposals to simplify the Pillar 2A framework for SDDTs. The PRA considers this analysis remains valid, subject to the following updates:

• Proportionality (FSMA regulatory principles): The PRA considers amending the CCoR single-name near-final policy to make it more risk sensitive, would make any potential supervisory engagement with SDDTs about single-name concentration risk more relevant.
• Transparency (FSMA regulatory principles): The PRA considers the change in operational risk methodology helps address respondents' concerns about the uncertainty surrounding how the PRA allocates SDDTs to buckets. The PRA also considers clarifying the criteria for SDDTs to conduct a detailed assessment of their credit risk portfolio, including the examples of bespoke or non-standard lending, would enhance transparency by setting clearer expectations on which SDDTs are required to conduct the assessment.
• LRRA principles of good regulation: The PRA considers that the minor amendments to the CCoR base add-on calculations improve consistency and better reflect the treatment firms would face outside the SDDT regime.

4: Capital Buffer Framework

Introduction

4.1 This chapter provides feedback to responses to Chapter 4 of CP7/24, which set out the PRA’s proposals to simplify the capital buffer framework for SDDTs. This chapter also sets out the PRA’s near-final policy on the capital buffer framework for SDDTs following the consultation.

4.2 In CP7/24, the PRA proposed to simplify the capital buffer framework for SDDTs while maintaining their overall resilience. Key proposals included:

• the introduction of a Single Capital Buffer (SCB) for SDDTs to replace the current multiple buffers.^{footnote [32]} The new SCB would be implemented as part of the Pillar 2B capital framework and would be set at no less than 3.5% of RWAs;^{footnote [33]}
• the replacement of the cyclical stress testing framework with a non-cyclical stress test which would inform the setting of SDDTs’ SCBs. The non-cyclical stress test would set a severity benchmark to support an SDDT’s own stress scenarios as part of its Internal Capital Adequacy Assessment Process (ICAAP);
• the removal of the automatic capital conservation measures, currently associated with the usage of some buffers under the Maximum Distributable Amount (MDA) framework;
• guidance on the supervisory response to buffer usage; and
• the introduction of a specific methodology for calculating the SCB for new and growing banks.

4.3 The PRA received 14 responses to its proposals on the capital buffer framework for SDDTs. Comments focused particularly on the following points:

• the components for setting the SCB – including stress testing, the risk management and governance (RMG) assessment and supervisory judgement;
• the calibration of the SCB;
• the proposal that SDDTs should treat the SCB as confidential;
• the use of the SCB in stressed circumstances; and
• the proposal to replace the current cyclical stress testing framework with one based on a non-cyclical stress test.

4.4 Having considered the responses to the consultation, the PRA has decided to make small amendments to SoP5/25 to provide SDDTs with greater clarity on the capital calculation for an SDDT with an RMG scalar. It has also updated SoP5/25 and SS4/25 to reflect its decision to change the name of the non-cyclical stress test scenarios to ‘SDDT scenarios’. Finally, it has published examples of the SDDT scenarios (Appendix 16). The PRA will otherwise maintain its proposals to simplify the capital buffer framework for SDDTs as set out in CP7/24.

4.5 This chapter provides feedback to responses to the proposals that were set out in Chapter 4 of CP7/24 and gives details of the amendments the PRA has made in the near-final policy compared to the proposals. The sections below are structured broadly along the same lines as Chapter 4 of CP7/24.

4.6 The appendices to this near-final PS contain the PRA’s near-final policy which will:

• amend the Capital Buffers Part of the PRA Rulebook;
• amend the Disclosure (CRR) Part of the PRA Rulebook;
• amend the Own Funds (CRR) Part of the PRA Rulebook;
• amend SS6/14 – Implementing capital buffers (Appendix 9);
• amend SS3/21 – Non-systemic UK banks: The Prudential Regulation Authority’s approach to new and growing banks (Appendix 8);
• amend SS16/16 – The minimum requirement for own funds and eligible liabilities (MREL) – buffers and Threshold Conditions (Appendix 10);
• introduce a new SoP5/25 – The PRA’s methodologies for setting Pillar 2 capital for Small Domestic Deposit Takers (SDDTs) (Appendix 5); and
• introduce a new SS4/25 – The Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review and Evaluation Process (SREP) for Small Domestic Deposit Takers (SDDTs) (Appendix 6).

4.7 Reporting changes related to the capital buffer framework proposals (which were set out in Chapter 7 of CP7/24) are discussed in Chapter 7 of this near-final PS.

The new Single Capital Buffer for SDDTs

The Single Capital Buffer

4.8 In CP7/24, the PRA proposed the introduction of the non-cyclical SCB for SDDTs as part of the Pillar 2 capital framework. To support SDDTs’ safety and soundness, an SDDT’s SCB would be set at least to 3.5% of its RWAs or to a higher level depending on the risks to which it is exposed and/or how well it is risk managed and governed. Historical losses analysis (see Box A in CP7/24) indicated that a buffer of at least 3.5% of RWAs would provide a level of resilience such that, on average, SDDTs could withstand a severe but plausible stress without breaching minimum capital requirements. The PRA would disapply the current capital buffer framework based on multiple capital buffers – ie the Capital Conservation Buffer (CCoB), the Countercyclical Capital Buffer (CCyB), and the PRA buffer – for SDDTs, which would make the capital regime less complex for SDDTs. As a result, SDDTs would also be descoped from the associated capital conservation measures.^{footnote [34]}

4.9 Six respondents welcomed the introduction of the SCB to replace the combined buffer (ie the CCoB and the CCyB) and the PRA buffer for SDDTs. Of these, two respondents noted that the descoping from the capital conservation framework would support the use of the SCB in stressed circumstances, and one of them added this would reduce SDDTs’ incentives to maintain large, costly management buffers. Another respondent agreed that having a non-cyclical buffer should make capital planning more predictable.

4.10 Respondents also provided comments and requested clarifications on aspects of the SCB proposal, which are detailed in the following sub-sections.

Components for setting the SCB

4.11 The PRA proposed that the setting of the SCB would be informed by three key components of the assessment process: stress impact, RMG assessment, and supervisory judgement. All components of the SCB, including the capital expectation related to any RMG scalar, would need to be met by CET1 capital. The PRA would ordinarily set the SCB as a percentage of RWAs. The PRA would communicate the value of the SCB to each SDDT individually.

4.12 The PRA received seven responses on the SCB setting process.

4.13 One respondent supported linking the setting of the SCB to stress test results despite it making the process quite complex compared to a flat buffer, while another noted that the SCB, though called ‘single’, still comprises three components.

4.14 The PRA considers that each component of the assessment process informing the setting of the SCB is needed to advance its primary objective of safety and soundness and does not reduce the value of the other simplifications made to the capital buffer framework for SDDTs – in particular, the descoping of SDDTs from the CCoB and CCyB. The three components in the setting of the SCB resemble the current practice for setting the PRA buffer. The PRA considers that the stress impact component would maintain the risk sensitivity of the SDDT capital buffer framework and would incentivise SDDTs to understand and manage their risks. The RMG assessment ensures that SDDTs with significantly weak risk management and governance are appropriately capitalised. Where such weaknesses are present, larger losses are likely to materialise in a stress, so setting the SCB to cover the risks posed by those weaknesses ensures that there would be sufficient capital to absorb those losses, should they crystalise. The exercise of supervisory judgement would provide the PRA with the flexibility to consider other relevant information and to adjust an SDDT’s SCB.

4.15 Two respondents expressed concern over the potential double counting of risks between the RMG assessment informing the size of the SCB and the assessment of Pillar 2A capital for operational risk for SDDTs. One of these respondents requested that the PRA clarify whether the Pillar 2A operational risk add-on or the SCB would be adjusted in a situation where similar risks related to risk management and governance had been identified as part of the RMG assessment informing the size of the SCB and the Pillar 2A assessment of operational risk. The other respondent argued that the PRA should clarify that operational risk concerns, leading to a decision to allocate a firm to bucket 2 or 3 under the proposed Pillar 2A operational risk methodology, would not be used to justify the setting of an RMG scalar. For this reason, it requested a clear separation in assessment criteria and justification for the distinction between the two assessments.

4.16 The PRA considers that there would be minimal overlap between the risks covered in the RMG assessment and those covered in the Pillar 2A operational risk assessment inside and outside the SDDT regime. This is because the assessment of operational risk^{footnote [35]} under Pillar 2A addresses known operational risks that are not adequately covered under Pillar 1 framework, while the RMG assessment aims to require firms with significant weaknesses in their risk management practices and/or firm-wide governance to maintain additional buffer capital as ‘insurance’ against an otherwise unquantifiable risk. This also provides a justification for treating the two assessments as distinct processes. The ICAAP, the Capital Supervisory Review and Evaluation Process (C-SREP) and, if required, the RMG assessment would be sequenced. This means that, in instances where the PRA judged it necessary to set an RMG scalar, or a suspended scalar^{footnote [36]}, the C-SREP – and so the assessment of operational risk – could be taken into consideration. In addition, where RMG weaknesses are identified in specific risk categories, they would not ordinarily be reflected in Pillar 2A capital requirements for those categories, thereby avoiding overcapitalisation for the same risk and the need to make complicated adjustments to Pillar 2A capital requirements or the SCB.^{footnote [37]}

4.17 As set out in Chapter 3, the PRA has decided to remove the bucketing approach proposed for Pillar 2A operational risk in CP7/24. Therefore, any concerns about the interaction between bucket allocation and the setting of an RMG scalar have been addressed with this change.

4.18 One respondent requested that the PRA provide high-level principles for when RMG scalars would apply to SDDTs, as the potential application of RMG scalars would introduce uncertainty into the SDDT capital buffer framework. It suggested that the RMG scalar should only be set in rare circumstances (offering examples of situations in which an RMG scalar could be applied and situations in which a scalar should never be applied) and only for outlier firms. It also requested that the PRA set the RMG scalar as a percentage uplift of the SCB, rather than a scalar applied to the CET1 component of the total capital requirement (TCR), arguing that the proposed approach was too complex.

4.19 As set out in CP7/24, the way RMG scalars would be applied to SDDTs follows the way RMG scalars are applied to the PRA buffer currently, so as not to create large differences in practice between SDDTs and non-SDDTs (which could create barriers to entry and exit from the SDDT regime). The PRA has set out in SoP5/25 that it would only consider the application of an RMG scalar to an SDDT with significantly weak RMG. These would be SDDTs that have deviated considerably from PRA expectations for management and governance practices.^{footnote [38]} Furthermore, before applying a scalar, the PRA may give the SDDT an indicative figure for the size of the scalar – often referred to as a suspended scalar.^{footnote [39]} This could give the firm time to understand and address its RMG weaknesses, which the PRA considers helps reduce concerns about the application of an RMG scalar.

4.20 The PRA considers that the principles for the application of the RMG scalar set out in SoP5/25 and SS4/25 reduce uncertainty about the application of the scalar and ensure consistency between capital buffer frameworks for SDDTs and other firms. The PRA also considers that limiting the application of RMG scalars to a defined, predetermined list of situations would hinder its ability to adapt its approach to the changing risk profiles of SDDTs. This, in turn, could undermine the PRA’s ability to advance its primary objective of promoting the safety and soundness of the firms it regulates.

4.21 To calculate the capital expectation in the SCB related to an RMG scalar (if applicable), the PRA would apply the scalar to the amount of CET1 required to meet the variable TCR. This is because the TCR accounts for the most relevant range of risks an SDDT may be exposed to, and these risks could become more severe in the presence of significant RMG weaknesses. The PRA considers that applying the RMG scalar to the SCB, rather than as proposed in CP7/24, would detach the calibration of the scalar from the nature of the risks that it seeks to address. This would create an inconsistency between the policy stated intent and its operationalisation. The PRA also considers that the link to the TCR maintains a simple mechanism that allows the scalar to evolve with the size of the firm and reflect its risks between capital assessments. However, to provide additional clarity on how the RMG scalar is considered when setting the SCB, the PRA has decided to add paragraph 12.26 to SoP5/25, which includes an illustrative example of the capital calculation for a firm with an RMG scalar. This example is relevant to all firms, not just SDDTs. The PRA will consider whether to include a paragraph analogous to paragraph 12.26 in SoP5/15 in due course. The PRA also confirms that the computation of the capital required due to the setting of an RMG scalar is a task completed by the PRA, with the resultant capital expectation communicated to the firm, a process the PRA considers to be sufficiently simple.

4.22 Finally, one respondent requested that the PRA clarify how it applies judgement when setting the current PRA buffer, and, in an SDDT’s case, would do so when setting the SCB, and how firms can address any concerns identified by the PRA.

4.23 The use of supervisory judgement to inform the setting of the SCB (under the proposals and the near-final policy) aligns with the PRA’s approach to supervision for all firms.^{footnote [40]} Further detail on exercising supervisory judgement for setting SDDTs SCB is in paragraphs 12.30-12.34 of SoP5/25. SDDTs and firms considering becoming SDDTs may also wish to refer to the PRA’s approach to banking supervision and SoP1/25 how the PRA uses dialogue with firms to take account of all relevant information when setting capital requirements and expectations and how it communicates the rationale for its judgements. it communicates the rationale for its judgements.

4.24 Having considered the responses about the SCB setting process, the PRA will maintain its overall proposal for the process that informs the setting of the SCB in the near-final policy but include additional guidance on the calculation of the capital expectation included in the SCB for a firm subject to an RMG scalar in SoP5/25 to improve the clarity. The PRA considers this a proportionate approach that advances its primary objective.

Calibration of the SCB

4.25 In CP7/24, the PRA proposed to set an SDDT’s SCB at no less than 3.5% of RWAs, before any RMG scalar is applied, and to align the frequency of assessing the SCB to an SDDT’s SREP cycle (typically taking place every two to four years).

4.26 The PRA received six responses to these proposals.

4.27 One respondent supported the proposal to set the SCB at no less than 3.5% of RWAs, highlighting that it was consistent with the through-the-cycle approach of the proposal. However, three respondents did not support the proposal, suggesting an SCB of 2.5% of RWAs instead. Of these, one respondent stated that the 3.5% level of the SCB should be lower so it does not reflect the CCyB rate in a standard risk environment. It also argued that the calibration of the SCB should not reflect the CCyB rate in a standard risk environment because the Basel Committee on Banking Supervision never intended for the CCyB to be used to support the safety and soundness of firms, the credit supply is not excessive currently, and SDDTs are not systemically important nor internationally active. Another respondent argued that a lower buffer would support PRA’s secondary competition objective by promoting a faster recovery of SDDTs from stress. One of these respondents argued that the 3.5% level of the SCB should be lower because there is no expectation that SDDTs should continue to lend in the event of an economic stress and because the setting of the buffer would be informed by non-cyclical stress test framework.

4.28 As set out in Box A in CP7/24, the PRA used the historical loss experience of SDDT-eligible firms and firms of similar sizes with similar business models in both normal and crisis times to inform the 3.5% calibration of the SCB, rather than basing it on the value of the combined buffer. The analysis of historical losses suggested that a buffer of no less than 3.5% RWAs would provide a level of resilience such that, on average, SDDTs could withstand a severe but plausible stress without breaching their TCRs. The PRA also considers that the capital buffer framework for SDDTs, as set out in this near-final PS, will continue to advance the safety and soundness of these firms, while also enhancing their ability to compete by reducing the complexity of the framework and the associated compliance costs.

4.29 One respondent questioned whether in developing the proposed 3.5% level of the SCB the PRA considered the increase in Basel 3.1 risk weights. It argued that this would result in an increase in the nominal amount of capital an SDDT would need to meet its SCB for a given buffer rate. Another respondent questioned the appropriateness of the proposed 3.5% level of the SCB given that the introduction of Basel 3.1 standards could mean that a smaller percentage of the buffer would translate into a higher nominal capital during a market downturn when compared to the current regime.

4.30 As explained in CP7/24, the proposals for the SCB and the Pillar 2A methodologies were calibrated so the level of SDDTs’ overall capital requirements and buffers remain broadly unchanged compared with current requirements and buffers and outside the SDDT regime. As part of the modelling of the impact of the proposals on the levels of capital requirements and buffers that was in the aggregated CBA in the CP, the PRA did consider the changes in SDDT’s RWAs as a result of the application of Basel 3.1 CR SA and OR SA. The modelling showed that RWAs could increase or decrease depending on the composition of a firm’s balance sheet.^{footnote [41]} The PRA, therefore, acknowledges that in some cases, for a given buffer rate, an SDDT could have a higher nominal buffer amount under the Basel 3.1 risk weights than it would under current risk weights. However, for the reasons set out in Chapter 2 of CP7/24, the PRA considers that Basel 3.1 standardised approach risk weights will better reflect the risks faced by SDDTs than current standardised approach risk weights. Furthermore, CP7/24 showed the tops of capital stacks could be lower in the SDDT regime than outside for many SDDT-eligible firms.^{footnote [42]}

4.31 As mentioned in paragraph 4.28, the calibration of the proposed 3.5% level of the SCB was informed by the historical losses experience in both normal and crisis times, ie not just in market downturns. When modelling the capital impact of the proposals, the PRA did consider that SDDT’s RWAs under Basel 3.1 CR SA could increase more during a market downturn than they would under current risk weights. Specifically, the modelling considered if the stress impact component would influence whether an SDDT would have an SCB exceeding 3.5%, which was reflected in the impact analysis in Chapter 9 in CP7/24. There are still uncertainties around how SDDTs’ buffers could change after the implementation of the Basel 3.1 standards, as more data and analysis would be needed to completely understand the behaviour of the new risk weights under stress.^{footnote [43]}

4.32 One respondent argued that the increase in minimum capital requirements relative to capital buffers for SDDTs under the proposals in CP7/24 and CP9/24 would be detrimental to SDDTs because minimum requirements must be held at all times, while buffers could be used in a stress.

4.33 The PRA continues to consider that the split between minimum capital requirements and buffers for SDDTs is appropriate for the simpler business models and non-systemic nature of these firms. As discussed in CP7/24, the balance between these two elements of the proposed capital framework for SDDTs would be tilted more towards minimum requirements than it would be outside of the SDDT regime. This is due to the removal of the CCyB adjustment to Pillar 2A, which would have the effect of making Pillar 2A requirements relatively larger compared to outside the regime, and an SCB on average lower than the combined buffer and PRA buffer. See paragraph 9.49 in Chapter 9 for more details. The PRA considers the changes to Pillar 2A and buffers – which would change the balance between minimum capital requirements and capital buffers for SDDTs – would be beneficial for SDDTs because they would radically simplify the capital framework and reduce uncertainty for SDDTs, while ensuring the capital requirements under Pillar 2A correspond more directly to the risks faced by an individual SDDT. These features of the SDDT regime make it easier to understand, which is beneficial to the resilience of SDDTs.

4.34 The PRA also considers that the descoping of SDDTs from capital conservation measures, combined with the proposal that SDDTs should treat the SCB as confidential, would make the SCB more usable in stress circumstances than the combined buffer. This should mitigate any perceived negative impact of having a balance between minimum capital requirements and buffer titled more towards minimum requirements compared to outside the SDDT regime.

4.35 One respondent requested that the PRA clarify aspects of the calibration, specifically how exposures to common and idiosyncratic risks would be measured and if elements linked to risk management and governance would be captured under the measurement of idiosyncratic risks. Additionally, another respondent requested that the PRA clarify how the SCB would be calculated and calibrated.

4.36 The SCB for SDDTs would be informed by three key components of the assessment process: stress impact, RMG assessment and supervisory judgement. The PRA set out in its proposal that setting the SCB at a level no lower than 3.5% of RWAs, before any RMG scalar is applied, would support resilience on average across SDDTs and through the cycle. The PRA considers the proposed level to be appropriate to cover common risks on average. However, the PRA acknowledged that SDDTs are exposed to common risks to varying degrees, as well as being exposed to idiosyncratic risks, and therefore it proposed to include a stress impact component in the assessment approach to inform the setting of the SCB to capture firm specific exposures to both common and idiosyncratic risks. Where the PRA assesses a firm’s RMG to be significantly weak, it would assess the need to include an RMG scalar in the SCB to cover these risks. Risks arising from RMG weaknesses are not typically covered in firms’ stress testing exercises and, as set out above, are not reflected in Pillar 2A requirements. The PRA considers that the information about how the SCB would reflect common and idiosyncratic and risks is provided in SoP5/25. In addition, the process for calculating and calibrating the SCB will largely be firm specific. Accordingly, the exact composition and calibration of an SDDT’s SCB will be determined on a case-by-case basis and therefore the PRA considers that it is difficult to provide additional guidance that would apply to firms generally.

4.37 Finally, one respondent requested that the PRA clarify how the SCB will be communicated to SDDTs.

4.38 In communicating the SCB, the PRA intends to continue the current approach used for the PRA buffer which SDDTs should already be familiar with. An SDDT will know the outcome of its ICAAP stress testing exercise, and the PRA will communicate the value of the SCB to the SDDT through the PRA’s SREP feedback letter.

4.39 Having considered the responses to the proposals on the calibration of the SCB, the PRA has decided to make no changes to the calibration in the near-final policy.

SCB non-cyclicality

4.40 In CP7/24, the PRA proposed to design the SCB as a non-cyclical buffer and to replace the current cyclical stress testing framework with one based on a non-cyclical scenario, which would aim to generate a relatively constant impact across ICAAP/SREP cycles. The PRA received no responses to this part of the proposal, and the PRA has decided to implement the proposal in the near-final policy.

SCB disclosure

4.41 In CP7/24, the PRA proposed that SDDTs should treat the SCB as confidential unless they are required to disclose it by law.

4.42 The PRA received two responses about this proposal. One of the respondents supported the proposal, noting that the confidentiality of the SCB would promote buffer usability if buffer usage is within the risk appetite of the firm’s board. The other respondent argued that the confidentiality of the SCB may limit investors’ ability to understand SDDTs’ capital positions (eg the extent to which they have significant surplus capital), potentially constraining SDDTs’ capacity to raise capital outside of a stress situation.

4.43 Having considered the responses, the PRA has decided to maintain its proposed approach to the disclosure of the SCB by SDDTs in the near-final policy. The PRA continues to consider that the confidentiality of the SCB promotes its usability in stress circumstances, which supports other simplifications made to the capital framework for SDDTs. The PRA considers that publicly communicating that the SCB will be set at a level no lower than 3.5% of RWAs should help investors to understand the capital positions of SDDTs, thereby supporting their ability to raise capital. Nevertheless, as set out in SS4/25, if an SDDT wishes to disclose the PRA’s SREP feedback letter, or any part of it, to any third parties other than their auditors they should, consistent with Fundamental Rule 7, provide appropriate prior notice to the PRA of the proposed form, timing, nature and purpose of the disclosure.

SCB level of application

4.44 The PRA proposed to apply the SCB at each level of consolidation which applies to the SDDT. The PRA received no responses to this proposal, and as such, the PRA has decided to make no changes to its policy as proposed in CP7/24.^{footnote [44]}

The use of the Single Capital Buffer

4.45 To promote and encourage the usability of the SCB, as part of its proposals to descope SDDTs from the combined buffer, the PRA would remove associated capital conservation measures that restrict distributions on a sliding scale the further a firm uses its combined buffer. The PRA set out details in SoP5/25 appended to CP7/24 of its proposed approach to an SDDT drawing down on its SCB.

4.46 The PRA received two responses to these proposals. One of them supported the proposals, noting it would ensure that SCBs are usable as intended. The other respondent requested that the PRA clarify that it would be more flexible in its approach to an SDDT drawing down its SCB during an economic downturn when the CCyB is released for larger firms. It argued that this clarification would ensure consistency between the usage of buffers inside and outside of the SDDT regime and reduce the likelihood that SDDTs modify business plans to avoid using the buffer.

4.47 Having considered the responses, the PRA has decided not to amend its approach to an SDDT drawing down its SCB in the near-final policy as it considers there is already sufficient clarity about the flexibility to use the SCB. For example, in the Annex on the ‘Supervisory Approach to Single Capital Buffer Usage’ in SoP5/25, the PRA details how an SDDT would be given a ‘reasonable period’ to rebuild its SCB in a gradual way following its usage. The Annex also details where the PRA has previously exercised reasonable flexibility regarding the rebuilding of buffers after a stress, as in the wake of the Covid-19 pandemic.

The stress testing framework for SDDTs

4.48 In CP7/24, the PRA proposed to publish annually two non-cyclical stress test scenarios which SDDTs could use as a template and severity benchmark to support their own ICAAP stress testing scenario design processes.

4.49 The PRA received eight responses about the stress testing framework for SDDTs.

4.50 Five respondents requested that the PRA publish an example of a non-cyclical stress test scenario. Of these, one respondent suggested that the PRA should provide guidance on the expected severity of the scenarios. Finally, one other respondent requested guidance on what level of the SCB a low-risk business model might expect to receive, arguing that without an example of the non-cyclical stress test scenario it is impossible for firms to project their SCBs.

4.51 Having considered these responses, the PRA has sought to provide additional clarity by publishing an example of the stress test scenarios for SDDTs (see Appendix 16). The PRA has also provided guidance around how it expects this stress testing framework for SDDTs to work (see Appendix 17). This will help SDDTs and firms considering becoming SDDTs to better understand the severity of the scenario and how the type and characteristics of their business models could impact the results of the stress testing assessment.

4.52 The PRA has also decided to rename the non-cyclical stress test scenarios the ‘SDDT scenarios’. This amendment makes clear that the scenarios apply only to SDDTs. The PRA will design the SDDT scenarios as macroeconomic shocks, linked to the financial cycle, that generates, on average, a relatively constant SCB for SDDTs if an SDDT’s risk profile and balance sheet remain largely unchanged over time. The PRA has updated SoP5/25 and SS4/25 to reflect the renaming of the scenarios.

4.53 One respondent requested the PRA allow capital injections, particularly where these are committed facilities, to be included in the stress testing assessment if these are used to support a firm’s balance sheet growth.

4.54 The PRA considers it prudent to continue to exclude capital injections from stress testing exercises, including for SDDTs. This is because, during a stress event, capital injections may not be forthcoming as adverse market conditions can negatively impact the availability of capital and the willingness of investors to commit funds.

4.55 Finally, two respondents argued that the current Pillar 2B framework (and the proposed SCB) penalises fast growing banks as it could require banks to hold capital for future loan book growth. In particular, they noted that firms that have been operating for at least five years, or have passed the point of becoming profitable, could still be fast growing and usually still raising capital. They argued that the way that capital raising is treated in stress testing assessments, as set out in paragraph 4.54, can impact stress testing outcomes particularly for firms that plan to continue to grow their RWAs, even in a stress scenario.

4.56 The PRA notes that this response is not specifically related to the SDDT regime but rather to the Pillar 2B framework that is applicable to all firms, both inside and outside the SDDT regime. The PRA expects that banks who have operated for more than five years should be sufficiently ‘established’, regardless of the rate at which they are growing.^{footnote [45]} As such, they should have a well-developed governance structure and strategic management actions that they can utilise during a stress event, and therefore the current Pillar 2B framework remains fit for purpose. The PRA also notes that, depending on the circumstances, firms benefit from a two-year transition period when moving to the stress testing approach under the Pillar 2B framework, supporting a gradual increase in the size of the buffer.^{footnote [46]}

4.57 Having considered these responses, the PRA has decided to make no changes to its policy on the stress testing framework for SDDTs as proposed in CP7/24. It has responded to respondents’ comments by publishing an example of the SDDT scenarios and further guidance.

Calculating the Single Capital Buffer for new and growing banks

4.58 In CP7/24, the PRA proposed to set the SCB for new and growing banks to cover six months of projected operating expenses, where operating expenses would be defined in the same way as it is for the purposes of calculating the PRA buffer in the current SS3/21. But in all cases, the SCBs for SDDTs that are new and growing banks would be at least 3.5% of RWAs. The PRA received no responses to this element of the proposals. As such, the PRA has decided to make no changes to its policy as proposed in CP7/24.

Consequential amendments

4.59 In relation to the proposed descoping of SDDTs from the combined buffer, the PRA proposed consequential amendments to certain provisions of the existing UK CRR which are being transferred to the PRA Rulebook or to existing PRA rules, as outlined in CP7/24.

Minority interests

4.60 The PRA proposed to amend the calculation of minority interests for SDDTs by removing the combined buffer from the calculation of the subsidiary’s capital surplus.^{footnote [47]} The PRA received no responses to this element of the proposals. The PRA has decided to make no changes to its policy as proposed in CP7/24: see Annex R in the near-final rule instrument (Appendix 2).

Capital reduction permissions

4.61 The PRA proposed to amend the wording in Article 30(1)(d)(iii) of the Rules Supplementing the CRR with Regards to Own Funds Requirements (previously Regulation EU No 241/2014) so that the reference in that rule to the combined buffer would only apply ‘where applicable to the firm concerned’. The PRA received no responses to this element of the proposals. The PRA has decided to make no changes to its policy as proposed in CP7/24: see Annex R in the near-final rule instrument (Appendix 2).

Limitations on redemption of capital instruments

4.62 The PRA proposed that the reference to the combined buffer in Article 10(3)(b) of Chapter 4 of Rules Supplementing the CRR with Regards to Own Funds Requirements (previously EU No 241/2014) would only apply ‘where applicable to the firm concerned’. The PRA received no responses to this element of the proposals. The PRA has decided to make no changes to its policy as proposed in CP7/24: see Annex R in the near-final rule instrument (Appendix 2).

Disclosure of capital buffers

4.63 The PRA proposed to amend Article 433b(1)(b) of the Disclosure (CRR) Part of the PRA Rulebook to descope SDDTs from the requirement to disclose the combined buffer. The PRA received no responses to this element of the proposals. The PRA has decided to make no changes to its policy as proposed in CP7/24: see Annex K in the near-final rule instrument (Appendix 2).

Other amendments

4.64 The PRA has corrected a reference to the Bank’s stress test in SoP5/25 to reflect the current bank stress testing framework. It has also replaced ‘STDF’ with ‘Stress Test Data Framework’ in SoP5/25 to clarify what STDF stands for.

4.65 The PRA has also amended text in SS4/25 to clarify PRA’s main considerations when setting the SCB for an SDDT.

PRA objectives analysis

4.66 In Chapter 4 of CP7/24 the PRA set out why it considered the proposed capital buffer framework for SDDTs would advance the PRA’s objectives. The PRA considers this analysis remains valid subject to the following updates.

4.67 The introduction of an illustrative example of the capital calculation for an SDDT with an RMG scalar and the clarifications set out in SoP5/25 improve the transparency of the capital buffer framework for SDDTs and, as such, advance the PRA’s primary objective of safety and soundness by making the framework easier for firms to understand and therefore implement, which could help SDDTs to reduce their compliance costs, helping them to build and conserve capital.

4.68 The introduction of an illustrative example of the capital calculation for an SDDT with an RMG scalar and the clarifications set out in SoP5/25 advance the PRA’s secondary competitiveness and growth objective. Making the SDDTs’ buffer framework clearer and more certain by doing this could make the UK a more attractive place for setting up a small foreign bank, which could lower the costs of financial intermediation and improve access to financial services in the economy.

‘Have regards’ analysis

4.69 In Chapter 4 of CP7/24 the PRA set out the regulatory principles it considered most material to the proposed capital buffer framework for SDDTs. The PRA considers this analysis remains valid subject to the following updates.

• Transparency (FSMA regulatory principles): The introduction of an illustrative example of the capital calculation for an SDDT with an RMG scalar and the clarifications set out in SoP5/25 would help SDDTs to better understand the PRA’s policies and expectations.
• Efficient and economic use of PRA resources (FSMA regulatory principles): The provision of specific guidance on the calculation of capital related to an RMG scalar for SDDTs could reduce supervisory queries on this matter and makes the provision of this information to SDDTs more consistent and less resource intensive for the PRA.

5: The Internal Capital Adequacy Assessment Process (ICAAP)

Introduction

5.1 This chapter provides feedback to responses to Chapter 5 of CP7/24, which set out the PRA’s proposed approach to simplifying the Internal Capital Adequacy Assessment Process (ICAAP), and the Reverse Stress Testing (RST) exercise within that, for SDDTs. In addition, it set out further proposed simplifications to the Internal Liquidity Adequacy Assessment Process (ILAAP), building on the simplifications to liquidity requirements introduced in PS15/23. This chapter also sets out the PRA’s near-final policy on the ICAAP and frequency of the ILAAP for SDDTs following the consultation.

5.2 In CP7/24, the PRA proposed simplifications to the ICAAP and the frequency of the ILAAP. In summary, the PRA proposed:

• to reduce the frequency with which SDDTs (other than new and growing banks)^{footnote [48]} would be expected to update and document the ICAAP to a minimum of every two years, except the Pillar 2A and Pillar 2B (including stress testing) elements of the ICAAP document, which SDDTs would continue to have to update at least annually;
• to introduce more proportionate expectations to elements of SDDTs’ ICAAP documents, namely allowing SDDTs to reference sections of the ILAAP in their ICAAP document when considering liquidity risk, reducing the frequency with which SDDTs would be expected to carry out and document the results of their RST from a minimum of annually to a minimum of every two years, and allowing SDDTs to perform a more qualitative RST;
• to create a new optional structure as a guide for SDDTs when producing their ICAAP documents; and
• to reduce the frequency with which SDDTs (other than new and growing banks) would be required to review and update their ILAAP document from at least annually to at least every two years.

5.3 The PRA received ten responses to its proposals on the ICAAP framework and ILAAP document frequency for SDDTs. Comments focused particularly on the following points:

• The proposed changes to ICAAP document frequency for SDDTs;
• The proposed simplifications to the ICAAP components for SDDTs, including RST;
• The proposed changes to ILAAP document frequency for SDDTs; and
• Other points, such as the proposed implementation date for the changes to the ICAAP and ILAAP document frequency, and potential further changes to the recovery plan and solvent exit analysis.

5.4 The appendices to this near-final PS contain the PRA’s near-final policy which will:

• amend Rule 15 of the Internal Capital Adequacy Assessment Part of the PRA Rulebook;
• amend Rules 11 and 13 of the Internal Liquidity Adequacy Assessment Part of the PRA Rulebook;
• amend SS24/15 – The PRA’s approach to supervising liquidity and funding risks (Appendix 11);
• introduce a new SS4/25 – The Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review and Evaluation Process (SREP) for Small Domestic Deposit Takers (SDDTs) (Appendix 6); and
• Introduce a new SoP5/25 – The PRA’s methodologies for setting Pillar 2 capital for Small Domestic Deposit Takers (Appendix 5).

5.5 More details on responses, the near-final policy, and the PRA’s approach to implementing the near-final policy are in the sections below. These sections are structured broadly along the same lines as Chapter 5 of CP7/24.

ICAAP document frequency

5.6 The PRA proposed to reduce the frequency with which SDDTs (other than new and growing banks) are expected to update and document the ICAAP to a minimum of two years, other than the Pillar 2A and Pillar 2B (including stress testing) elements of the ICAAP document, for which it proposed continuing to expect updates at least annually. Under the proposals, it would remain the responsibility of an SDDT to ensure its ICAAP document is relevant and current, and the PRA would have discretion to request an annual update from an SDDT if it judged it to be necessary. Furthermore, as is currently the case, the PRA would have the discretion to use other supervisory tools (including but not limited to risk management and governance (RMG) scalars) if it concluded there were concerns around ICAAP quality or governance of the ICAAP document.

5.7 For new and growing banks, the PRA proposed to maintain its expectation that these firms update and document their ICAAPs on an annual basis, as the business models of these firms often adjust quickly as they develop.

5.8 In addition, the PRA proposed that an SDDT would be expected to conduct a more frequent review of its ICAAP in the event of changes to its business. As part of this, the PRA considers it is important that an SDDT notifies the PRA in advance of making changes to its business, strategy, or scale of activities as part of a firm’s regular discussions with its supervisors. New and growing banks are already expected to do so, as set out in SS3/21.^{footnote [49]} The PRA considers that for SDDTs more broadly, notifying the PRA in advance of making changes to their business, strategy, or scale of activities is within scope of Fundamental Rule 7.^{footnote [50]}

5.9 Five respondents supported the PRA’s proposed reduced minimum frequency for ICAAPs. Three respondents suggested that the frequency with which SDDTs would be expected to review and update their Pillar 2A and Pillar 2B (including stress testing) assessments should be reduced, for example to every two years, in line with the PRA’s proposal on ICAAP document frequency. One respondent noted in particular that the Pillar 2A and Pillar 2B assessments represent 80% of the complexity of the ICAAP, and another respondent commented that the benefit of the ICAAP package as a whole would be limited in view of the PRA’s proposal that SDDTs continue to re-assess Pillar 2A and Pillar 2B at least annually.

5.10 Four respondents noted that the two-year ICAAP document cycle proposed by the PRA does not align with the Capital Supervisory Review and Evaluation Process (C-SREP) cycle for all SDDTs, as C-SREPs are on a three-year cycle for some SDDTs. Respondents suggested that it would be helpful if instead SDDTs were able to make their ICAAP updates in line with the C-SREP cycle that applies to them. Three respondents suggested that the PRA should align the ICAAP and the C-SREP cycles. One respondent suggested that this could be achieved by changing the C-SREP cycle to every two years for these firms, or by providing guidance that the PRA would accept prior year ICAAP materials.

5.11 Having considered the responses, the PRA has decided to also reduce the minimum frequency of the Pillar 2A and Pillar 2B (including stress testing) assessments for SDDTs (other than new and growing banks) from at least annually to at least every two years. The PRA considers that for SDDTs (other than new and growing banks) these assessments remain relatively stable over a two-year period. SDDTs will still need to meet the overall financial adequacy rule at all times and the overall Pillar 2 rule.^{footnote [51]} An SDDT will also still need to ensure its ICAAP document is relevant and current (including its Pillar 2A and Pillar 2B assessments). And, as noted in paragraph 5.6, the PRA will have discretion to request annual updates from an SDDT if it is judged to be necessary, for example if an ICAAP document is of poor quality, until such time as the quality of the ICAAP and the underlying assessments improve. The PRA will also use other supervisory tools, as mentioned in paragraph 5.6, if it concludes there are concerns about the quality of an SDDT’s ICAAP or ICAAP governance.

5.12 The PRA undertakes C-SREPs for non-systemic firms, including SDDTs, on a continuous basis over a multi-year cycle taking into account risks and priorities across the sector. The PRA does not consider that linking ICAAP document cycles with the C-SREP cycle would allow this risk-based prioritisation to operate effectively. However, the PRA will continue to schedule C-SREPs so that the ICAAP reviewed is relatively recent (where possible) and the PRA considers that C-SREPs can be conducted based on prior year ICAAP documents.

5.13 For SDDTs which are new and growing banks, the near-final policy is in line with the proposals, ie new and growing banks will need to continue to update their ICAAPs at least annually as the business models of these firms often adjust quickly as they evolve.

Reducing elements of the ICAAP

5.14 In addition to the proposed reduction in the frequency of updates to elements of the ICAAP document, the PRA proposed to introduce more proportionate expectations in relation to some ICAAP components for SDDTs.

Referencing the ILAAP

5.15 The PRA proposed that an SDDT should be able to reference sections of the ILAAP document when considering liquidity risk in its ICAAP document, rather than duplicating that material. If the ILAAP document highlights liquidity risk concerns, the PRA proposed to expect the ICAAP to build on this analysis to consider how liquidity risks could lead to potential losses and have capital adequacy implications. However, if there are no such concerns, the PRA proposed not to expect SDDTs to conduct deeper analysis in the ICAAP document beyond the material in the ILAAP document.

5.16 One respondent welcomed the PRA’s proposals. Six respondents noted that there remains some duplication between documents such as the ICAAP, ILAAP, and recovery plan and asked that the PRA allow SDDTs to further streamline these documents, for example by allowing SDDTs to combine these documents.

5.17 The ICAAP, ILAAP and recovery plan documents are required to consider separate and distinct aspects of a firm’s financial position. To the extent that there is overlap between the material in the documents (for example, business plan) firms can use the same material.

5.18 The PRA considers that its simplifications to the ILAAP document which have already been implemented for SDDTs together with the near-final policy in respect of simplifications to the ICAAP and frequency of ILAAP documents set out in this chapter (including permitting increased referencing by the ICAAP of the ILAAP document), would help to maintain SDDTs’ resilience while delivering significant simplifications and savings for many SDDTs. The PRA therefore does not intend to make further simplifications in respect of streamlining or combining the ICAAP and ILAAP documents and recovery plan at this time. However, the PRA will consider this again when looking at potential ways of embedding Strong and Simple in its supervisory approach.

Reverse stress testing

5.19 The PRA proposed to reduce the frequency with which SDDTs are required to carry out and document the results of their RST from a minimum of annually to a minimum of every two years. The PRA proposed to maintain the discretion to request RST more regularly, though only if necessary.

5.20 The PRA also proposed to allow SDDTs to perform a more qualitative reverse stress test. Under this approach, an SDDT would need to consider, for example, scenarios in which the failure of a major market participant or a significant market disruption would cause it to fail, and to describe the scenario and the stress testing approach. However, the PRA proposed not to expect quantitative analysis to be included in the ICAAP document. The PRA proposed that it may still request that an SDDT quantify the level of financial losses that would place it in a situation of business failure should a scenario crystallise.

5.21 One respondent welcomed the PRA's proposals to reduce minimum frequency of reverse stress testing to at least every two years for SDDTs. One respondent noted that while the proposals could save time, firms may choose to perform these tests more frequently than every two years as part of strategic and emerging risk identification. Another respondent asked for further guidance on how point of failure might be analysed on a qualitative basis.

5.22 The aim of the PRA’s proposal was to reduce the regulatory burden for SDDTs by removing the expectation that they undertake complex calculations in order to fully quantify the impact of a very severe scenario within a reverse stress test, where the firm perceives that such in-depth quantitative analysis does not add value and does not materially impact the findings or outcomes of the reverse stress testing analysis. The PRA considers that SDDTs could include (but not be limited to) the following analysis as part of a qualitative reverse stress test: identification of the risks, events or scenarios that could cause the firm to fail or cause its business plan to become unviable; assessment of remedial actions; and, identification and assessment of mitigants that could either prevent such risks from crystallising or mitigate their impacts. The PRA has updated SS4/25 to reflect this clarification. The PRA has also amended SS4/25 to provide further clarity on the circumstances in which the PRA may request RST more regularly.

5.23 Three respondents noted that firms are encouraged to use RST as part of their recovery plan, and that without a reduction in the frequency of the recovery plan, the benefit associated with this proposal is limited. The PRA has set out proposals on reducing the minimum update frequency for recovery plans for SDDTs in CP14/25 – Amendments to Resolution Assessment threshold and Recovery Plans review frequency.

Optional ICAAP document structure

5.24 In CP7/24, the PRA proposed to create a new optional structure as a guide for SDDTs when producing their ICAAP documents. SDDTs would retain autonomy over how to conduct their risk assessment, how to design their stresses and scenarios, and how to justify the use of their chosen methodologies. The PRA proposed that the structure would be an optional guide and not meant to be exhaustive.

5.25 One respondent supported the introduction of the optional ICAAP structure.

5.26 The PRA has decided to implement the optional ICAAP structure as proposed in CP7/24 and set out in the appendices of SS4/25.

ILAAP frequency

5.27 The PRA proposed to reduce the frequency with which SDDTs (other than new and growing banks) are required to review and update their ILAAP document from at least annually to at least every two years. Under the proposal, the PRA proposed it would remain the responsibility of an SDDT to ensure its ILAAP document is relevant and current and would expect an SDDT to proactively ensure that a more regular update is undertaken if necessary (for example in response to changes to the business model or funding profile of a firm, which affect the relevance of the ILAAP), and also proposed that the PRA might request an updated ILAAP document from an SDDT if it considered this necessary.

5.28 For new and growing banks, the PRA proposed to maintain its expectation that these firms update and document their ILAAPs on an annual basis.

5.29 Six respondents supported the PRA’s proposal to reduce ILAAP frequency. Four respondents noted that the two-year minimum update frequency for the ILAAP document proposed by the PRA does not align with the Liquidity Supervisory Review and Evaluation Process (L-SREP) cycles for all SDDTs, as L-SREPs are on a three-year cycle for some SDDTs. Respondents suggested that it would be helpful if instead they were able to make their ILAAP document updates in line with the respective L-SREP cycle that applies to them. One respondent suggested that this could be achieved by changing the L-SREP cycle to every two years for these firms, or by providing guidance that the PRA would accept prior year ILAAP materials.

5.30 Having considered the responses, the PRA has decided to proceed with its proposal to reduce the frequency with which SDDTs (other than new and growing banks) are required to update and document their ILAAP to at least every two years because it considers this frequency is appropriate for these firms. However, as with the ICAAP and C-SREP, the PRA considers that L-SREPs can be conducted based on prior year ILAAP documents. The PRA has also updated SS24/15 to provide further clarity on circumstances in which it may request an updated ILAAP from an SDDT.

5.31 For SDDTs which are new and growing banks, the near-final policy is in line with the proposals, ie new and growing banks will need to continue to update their ILAAPs at least annually as the business models of these firms often adjust quickly as they develop. The PRA has updated SS24/15 to clarify this expectation.

Other feedback

Implementing ICAAP and ILAAP frequency reductions

5.32 In CP7/24, the PRA proposed that the changes to the ICAAP and ILAAP would take effect on the proposed implementation date for the SDDT capital regime of 1 January 2027.

5.33 Two respondents requested that the reduced frequency of the ICAAP document be implemented before 1 January 2027. Three respondents requested that the reduced frequency of the ILAAP document be implemented before 1 January 2027, noting in particular that the PRA’s proposals on ILAAP document frequency finalise liquidity policy introduced by PS15/23.

5.34 The PRA considers that early implementation of the ICAAP frequency reduction would ease the regulatory burden on firms by removing the need for a full ICAAP in 2026. During this period firms will need to complete SDDT data submissions to enable the PRA to conduct an off-cycle review of firm-specific Pillar 2 capital requirements and buffers ahead of 1 January 2027 (see paragraphs 8.27-8.32). SDDTs will also need to be able to understand and implement the new SDDT capital requirements by 1 January 2027. Allowing SDDTs to access the ICAAP frequency reduction early would potentially free up firm resources for this implementation work. The PRA notes also that, as set out in the ICAA Part of the PRA Rulebook, firms must have in place sound, effective and comprehensive strategies, processes and systems to assess and maintain capital on an ongoing basis, and to identify and manage major sources of risk.

5.35 The PRA recognises that its proposals on ILAAP document frequency finalise liquidity policies that were introduced by PS15/23 and implemented on 1 July 2024.

5.36 The PRA has therefore decided that the rules and expectations relating to ICAAP and ILAAP frequency will take effect from the date of publication of the final policy statement (see also paragraph 1.53).

The recovery plan and solvent exit analysis

5.37 Six respondents recommended that recovery plan review frequency for SDDTs should be reduced to at least every two years, in line with the PRA’s proposals on ICAAP and ILAAP frequency. One respondent recommended that the PRA review the benefit of the recovery plan and consider whether SDDTs could stop producing a recovery plan. One respondent also recommended that the PRA consider reducing the frequency of the solvent exit analysis in line with proposals on ICAAP and ILAAP frequency.

5.38 The PRA considers that these recommendations on the recovery plan and solvent exit analysis are out of scope of the proposals set out in CP7/24. However, as noted in paragraph 5.23, the PRA has set out proposals on reducing the minimum update frequency for recovery plans for SDDTs in CP14/25.

PRA objectives analysis

5.39 In Chapter 5 of CP7/24 the PRA set out why it considered the proposed approach to simplifying the ICAAP and the further simplifications to the ILAAP for SDDTs would advance the PRA’s objectives. The PRA considers this analysis remains valid subject to the following updates.

5.40 The PRA considers that reducing the minimum Pillar 2A and Pillar 2B update frequency for SDDTs would advance the PRA’s secondary competition objective by reducing compliance costs for SDDTs, other than new and growing banks.

5.41 In addition, the PRA considers that the expected reduction in SDDTs’ compliance costs could improve firms’ resilience and could have a positive impact on their ability to support economic growth. These lower costs could potentially increase incentives for small foreign banks to establish banks in the UK.

‘Have regards’ analysis

5.42 In developing the near-final policy set out in this chapter, the PRA has had regard to its framework of regulatory principles.

5.43 In Chapter 5 of CP7/24 the PRA set out the regulatory principles it considered most material to the proposed approach to simplifying the ICAAP and the further simplifications to the ILAAP for SDDTs. The PRA considers its analysis remains valid subject to the following updates:

• Proportionality (FSMA regulatory principles): The reduction in the frequency of Pillar 2A and Pillar 2B updates for SDDTs would result in a more proportionate set of prudential requirements for SDDTs. In addition, enabling SDDTs to implement the ICAAP and ILAAP document frequency reduction from the date of publication of the final PS should reduce regulatory overheads during a period that SDDTs are planning to implement the SDDT capital regime and submitting data required for the off-cycle review of firm-specific Pillar 2 requirements and buffers. The PRA notes that these simplifications have not been applied to new and growing banks but considers that the business models of these firms are most likely to change, and that reviewing and updating their Pillar 2A and Pillar 2B assessments on an annual basis is an important tool in maintaining their resilience.
• Creating a regulatory environment which facilitates growth through supporting competition and innovation: The reduction in the frequency of Pillar 2A and Pillar 2B updates for SDDTs and the implementation of this from the date of publication of the final PS could lower costs for SDDTs, which could support effective competition, which in turn could lower the costs of financial intermediation.

6: Simplified capital deductions

Introduction

6.1 This chapter provides feedback to responses to Chapter 6 of CP7/24, which set out the PRA’s proposals to simplify the capital deduction requirements for SDDTs when calculating regulatory capital resources. It also provides feedback to responses to related proposals in CP13/24. This chapter also sets out the PRA’s near-final policy on simplified capital deductions for SDDTs following the consultations.

6.2 In CP7/24, the PRA proposed to simplify the capital deduction requirements for SDDTs by removing:

• multiple deduction thresholds;
• different treatments between non-significant investments (NSIs), deferred tax assets (DTAs) and significant investments (SIs);
• the requirement to deduct NSIs and SIs from different tiers of capital; and
• the optionality between deduction and risk weighting for certain items, namely qualifying holdings outside the financial sector, certain securitisation positions^{footnote [52]} and free deliveries^{footnote [53]} (collectively referred to as ‘specific items’).

6.3 Instead, the PRA proposed to simplify the deduction requirements by requiring:

• A single group: all items subject to threshold calculations or optional risk weightings would be added together and considered as a single group for the purpose of calculating the capital deduction. These items are: DTAs that are dependent on future profitability and arise from temporary differences; holdings in regulatory capital instruments of financial sector entities (including SI and NSI and combining CET1, AT1 and Tier 2); and the specific items mentioned above;
• A single threshold: the aggregate amount of the items above would be assessed against a single threshold of 25% of the firm’s net CET1 capital; and
• One net CET1 basis: the 25% threshold would be applied to one net CET1 capital amount.

6.4 Under the proposals, SDDTs would be required to deduct from their CET1 the aggregate amount of the items that exceeds the 25% threshold. The amount deducted would be apportioned across the respective items. The amounts below the 25% threshold would be risk weighted at 250% for NSI, SI, and DTA items and 1250% for the other items.

6.5 In CP13/24, the PRA set out related proposals, namely:

• Proposal 8 in Chapter 3 of CP13/24 to remove optionality for SDDTs between fully deducting certain securitisation positions^{footnote [54]} from CET1 capital and risk weighting them at 1250%; and
• Proposal 1 in Chapter 5 of CP13/24 to remove optionality for SDDTs between fully deducting free delivery exposures from CET1 capital and risk weighting them at 1250%.

6.6 In line with the proposals in Chapter 6 of CP7/24, the PRA proposed in CP13/24 that these items would instead be assessed as part of the calculation set out in paragraphs 6.3 and 6.4 above.

6.7 The PRA received three responses to its proposals on the simplified capital deductions for SDDTs in CP7/24. Two respondents to CP13/24 commented on the related proposals mentioned above.

6.8 Of the three respondents to CP7/24, one indicated its support for the PRA’s proposed simplified capital deductions. That respondent and one other did, however, ask that the PRA require full deduction of the specific items instead of the PRA’s proposed approach which would have required partial deduction and partial risk weighting, based on a threshold calculation. These respondents explained that the PRA’s proposed treatment was punitive for many SDDTs as applying a 1250% risk-weight to the amounts within the threshold would require them to hold capital in excess of the amount of the exposure of the specific items^{footnote [55]}.

6.9 The two respondents to CP13/24 provided similar responses and arguments.

6.10 Having considered these responses, the PRA has decided to amend the treatment of the specific items mentioned above by requiring full capital deduction of the specific items by SDDTs, namely, qualifying holdings outside the financial sector, certain securitisation positions^{footnote [56]} and free deliveries. The PRA considers that this provides for an appropriate prudent treatment of the specific items in a simplified way for SDDTs.

6.11 The PRA received one comment suggesting drafting changes to Article 45A(8). Having considered this comment, the PRA has decided not to include this provision in the near-final rules. Instead, the PRA has made minor drafting amendments in the near-final rules to improve the clarity of the requirements for the deduction calculation, and has provided more detailed guidance in the relevant near-final reporting instructions.

6.12 The PRA has not made any other changes to its proposals for simplified capital deductions for SDDTs.

6.13 The near-final policy in relation to simplified capital deductions for SDDTs is summarised in Table 1.

Table 1: Near-final SDDT simplified capital deduction requirements

6.14 The appendices to this near-final PS contain the PRA’s near-final policy which will:

• amend the Own Funds (CRR) Part of the PRA Rulebook ^{footnote [57]}:

PRA objectives analysis

6.15 In Chapter 6 of CP7/24 the PRA set out why it considered the proposals to simplify the capital deduction requirements for SDDTs would advance the PRA’s objectives. The PRA considers this analysis remains valid subject to the following updates.

6.16 The PRA considers that mandating full capital deduction for specific items would advance the PRA’s primary objective of safety and soundness by continuing to limit the amounts that can be included in SDDTs’ CET1 capital for certain items that might not retain their value in stress. 

6.17 The updated approach would also avoid SDDTs having to maintain capital in excess of the amount of the exposure of specific items. This would free up capital which SDDTs could use to support activities such as lending, which would in turn advance the PRA’s secondary competition and secondary competitiveness and growth objective.

‘Have regards’ analysis

6.18 In developing the near-final policy set out in this chapter, the PRA has had regard to its framework of regulatory principles.

6.19 The PRA considers its analysis of its ‘have regards’, as presented in Chapter 6 of CP7/24, remains valid subject to the following updates:

• Proportionality (FSMA regulatory principles): The PRA recognises that SDDTs typically have substantial CET1 capital bases and relatively limited exposures to items such as certain securitisations, free deliveries, or qualifying holdings. Mandating full capital deductions for these exposures, instead of a partial risk-weight/deduction approach, would ensure a simpler and more proportionate outcome.
• Transparency (FSMA regulatory principles): The PRA considers that removing optionality and mandating full deductions would enhance clarity and predictability in the capital framework for SDDTs. This would reduce inconsistencies in how SDDTs would treat specific items and supports a more transparent regulatory environment.
• Efficient and economic use of PRA resources (FSMA regulatory principles): Standardising the treatment of the specific items through mandatory deductions would reduce the complexity of supervisory assessments and monitoring. This simplification would support more efficient use of supervisory resources and facilitate consistent implementation across firms.

7: Reporting

Introduction

7.1 This chapter provides feedback to responses to Chapter 7 of CP7/24, which set out the PRA’s proposed changes to SDDTs’ reporting to the PRA under the proposed simplified capital regime set out in CP7/24. This chapter also sets out the PRA’s near-final policy on SDDTs’ reporting under the simplified capital regime following the consultation. This should be read in conjunction with Chapters 2 to 6 as it reflects the near-final policy in those chapters.

7.2 In line with the proposal in Chapter 2 of CP7/24 to apply relevant Basel 3.1 risk-weighted Pillar 1 capital requirements to SDDTs, in CP7/24 the PRA proposed to:

• apply the related Basel 3.1 reporting changes set out in PS9/24 to SDDTs; 
• simplify the reporting framework for SDDTs by descoping them from 38 reporting templates (a number of which would not be relevant to many SDDTs, depending on their size and activities), replacing most Counterparty Credit Risk (CCR) reporting with a simplified template, and amending 24 templates and instructions (of which six changes would be to reporting instructions only);
• make amendments to Pillar 1 reporting for own funds, Capital+, Large Exposures, Leverage Ratio and Pillar 2 reporting requirements; and
• implement the reporting changes in line with the proposed implementation date set out in Chapter 1 of CP7/24 of 1 January 2027.

7.3 In CP7/24, the PRA proposed that SDDTs would have their own tailored templates and reporting instructions for those templates which are currently part of the own funds and own funds requirements reporting module within COREP (often referred to as ‘COR001a’), Capital+, and FSA071. The PRA proposed that changes to reporting for Large Exposures, Leverage Ratio and PRA111 would be made to the templates and instructions that are used by both SDDTs and non-SDDTs.

7.4 The PRA also proposed to create a separate chapter in the Reporting (CRR) Part of the PRA Rulebook to specify the format and frequency of reporting on own funds and own funds requirements for SDDTs, and to create SDDT-specific annexes with the related templates and instructions for SDDTs.

7.5 The PRA received six responses to its proposals for a simplified reporting framework for SDDTs. Comments focused on the following:

• the PRA’s proposed simplifications to the reporting framework for SDDTs;
• the frequency of reporting by SDDTs;
• the implementation date of the changes to the reporting requirements for SDDTs; and
• a request that the PRA work with reporting software providers to ensure these vendors can provide reporting solutions to SDDTs at a low cost.

7.6 Having considered the responses to the consultation, the PRA has decided to make further changes to reporting by SDDTs. In particular, the PRA is descoping SDDTs from a further 13 templates, bringing the total number of capital-related templates that SDDTs will be descoped from to 51 (some of which will already not be relevant to many SDDTs, depending on their size and activities). The PRA is also making some further minor tailoring of templates for SDDTs as part of this near-final policy, including deleting additional rows and columns in templates required to be reported by SDDTs. As a result, the capital-related reporting requirements and instructions which will apply to SDDTs will be significantly simpler and shorter than for other firms.

7.7 The appendices to this near-final PS contain the PRA’s near-final policy which will amend:

• the Reporting (CRR) Part of the PRA Rulebook;
• the Regulatory Reporting Part of the PRA Rulebook;
• the Reporting Pillar 2 Part of the PRA Rulebook;
• the SDDT Regime – General Application Part of the PRA Rulebook;
• the PRA Rulebook Glossary;
• SS32/15 – Pillar 2 reporting, including instructions for completing data items FSA071 to FSA082, PRA111, and PRA119 (Appendix 12); and
• SS34/15 – Guidelines for completing regulatory reports (Appendix 13).

7.8 The appendices also contain the near-final reporting templates and reporting instructions (see Appendix 15).

7.9 The sections below have been structured similarly to Chapter 7 of CP7/24, and include discussion of the main areas where the PRA received comments from respondents.

Summary of near-final reporting changes

7.10 Five respondents welcomed the PRA’s reporting proposals: four respondents supported the proposals to descope SDDTs from 38 regulatory reporting templates, while acknowledging that some of the benefits may be relatively limited; while another respondent welcomed the simplifications brought by the reporting proposals more generally.

7.11 Three respondents asked that the PRA go further in simplifying reporting for SDDTs, for example by carrying out a fundamental review of the entire suite of regulatory reporting templates or considering further reductions in the number, frequency or extent of the templates.

7.12 Whilst a fundamental review of all PRA regulatory reporting templates is beyond the scope of CP7/24, the PRA has considered these requests specifically in relation to the areas of focus of CP7/24. In so doing, as noted above, the PRA has identified an additional 13 templates that it considers SDDTs can be descoped from compared to the proposals in CP7/24.^{footnote [58]}

7.13 The PRA has also decided to create SDDT-specific versions of four additional templates: C 03.00, OF 09.01, C14.01 and OF 16.00. For two of these templates (OF 09.01 and OF 16.00) the templates are the same as those reported by non-SDDTs. The PRA has made this change for technical reasons to group all own funds and own funds requirements together to increase the clarity and accessibility of the reporting requirements for SDDTs. The C 03.00 template and C14.01 template have been tailored to SDDTs by removing additional rows and columns respectively (see paragraphs 7.22 and 7.32 below).

7.14 The resulting near-final changes to reporting templates and instructions for SDDTs are summarised in Table 2 below. In line with the proposals in CP7/24, these near-final changes assume the Basel 3.1 reporting changes in PS9/24 have been implemented. The ‘descope’ columns in Table 2 show those templates descoped under the proposals in CP7/24 and separately the additional templates which have been descoped as part of this near-final policy.

7.15 In Chapter 7 of CP7/24, the PRA explained that the proposed new and tailored templates for SDDTs were labelled with an ‘S’ to indicate they are SDDT-specific templates and that this label was subject to future change as the PRA finalises the reporting proposals. The PRA has finalised the naming convention for the SDDT reporting templates and Appendix 14 contains the mapping of the new codes to those used in CP7/24. This chapter references the codes used in CP7/24 for the purpose of familiarity for readers.

7.16 In addition to the changes set out in Table 2, as proposed in CP7/24, the PRA is updating the Reporting (CRR) Part of the PRA Rulebook and the related reporting instructions to make clear that certain templates relating to IRB approaches to credit (OF 08.01 to OF 08.07, OF 09.02, OF 34.07), Commodities (OF 23.00) and the output floor (OF 02.01) are not relevant to SDDTs.

7.17 One respondent requested the PRA review the frequency of its regulatory reporting, specifically where numbers don’t change materially.

7.18 The PRA has considered this request and has decided to retain the current reporting frequency. The PRA considers that the current reporting frequency is appropriate to support the supervision of SDDTs, particularly given the need for timely capital data and the interrelationships between capital templates which benefit from a consistent frequency across capital reporting.

7.19 There will likely be further opportunities to streamline reporting requirements for SDDTs over time. The PRA published CP21/25 – Future banking data review: Deletion of banking reporting templates on 22 September 2025 which proposed whole template deletions to Financial Reporting (FINREP), as well as capital and operational continuity templates, which would benefit a number of SDDTs. In addition, and looking further ahead, the PRA has announced its intent to progress more holistic reform of banking reporting under its Future Banking Data (FBD) programme.^{footnote [59]}

7.20 More detail on the comments received, and the near-final policy, in respect of reporting for individual risk areas is set out in the sections below.

Capital adequacy and group solvency

7.21 In CP7/24, the PRA proposed to apply Basel 3.1 reporting changes set out in PS9/24 to SDDTs. In relation to capital adequacy and group solvency, the PRA also proposed to amend reporting templates C 01.00, OF 02.00, PRA113, PRA114, C 04.00, C 06.01 and C 06.02 respectively.

7.22 The PRA received no comments on these proposals. However, having taken into consideration the responses received asking the PRA to further simplify reporting for SDDTs as outlined above, the PRA has decided to make the following additional changes in relation to capital adequacy and group solvency reporting requirements and instructions:

• Descoping SDDTs from templates C 05.01 and C 05.02, which report on transitional provisions, as these provisions have now expired;^{footnote [60]}
• Deleting rows in the SDDT versions of the C 01.00, C 03.00 and PRA113 templates which relate to these expired transitional provisions;
• Adding three rows to the SDDT version of template C 04.00 to collect information on fair value assets and liability balances used to calculate additional valuation adjustments. This is as a result of its decision to descope SDDTs from reporting templates C 32.01 - C 32.04 as described in paragraph 7.39 below. This additional data will ensure key information continues to be collected in relation to prudent valuation whilst deleting the requirements for firms to submit separate detailed templates to the PRA; and
• Deleting rows in the SDDT version of the PRA113 template which relate to items which can be deducted or risk weighted at 1250% as these will be fully deducted under the near-final policy set out in Chapter 6.

Credit risk, counterparty credit risk and securitisations

Credit risk

7.23 In Chapter 7 of CP7/24, the PRA proposed a number of changes in relation to reporting of credit risk by SDDTs:

• to introduce an SDDT specific template OF 07.00S for reporting of credit risk data;
• to amend instructions for template OF 09.01 to ask SDDTs not to report counterparty credit risk on certain derivatives, and to apply the simplified capital deduction threshold calculation, in line with proposals in Chapter 2 and Chapter 6 of CP7/24 respectively.
• to introduce an SDDT specific template C 09.04S to continue to monitor SDDTs’ credit exposures by country, as this forms part of the SDDT criteria;
• to amend rule 2.4 and rule 2.5 of the SDDT Regime – General Application Part of the PRA Rulebook in line with the above change.

7.24 The PRA received no comments on these proposals and so has made these changes in the near-final policy. The only notable change the PRA has made in relation to credit risk reporting is to create an SDDT-specific version of template OF 09.01 though, as explained in paragraph 7.13, this is no different to the template SDDTs would otherwise be required to complete.

Settlement risk

7.25 In CP7/24, the PRA did not propose any changes to reporting of settlement risk by SDDTs. However, having taken into consideration the responses received asking that the PRA further simplify reporting for SDDTs as outlined above, the PRA has decided to descope SDDTs from reporting template C 11.00.

Counterparty credit risk (CCR)

7.26 In Chapter 2 of CP7/24, the PRA proposed to descope SDDTs from the calculation of CCR requirements in relation to derivatives (with some exceptions). In Chapter 7 of CP7/24, the PRA proposed to significantly reduce the reporting requirements on SDDTs in relation to CCR by:

• descoping SDDTs from reporting templates C 34.01 to C 34.05 and C 34.08 to C 34.11;
• replacing these with a new simplified template C 34.XXS to provide the PRA with some basic information on SDDTs’ portfolios of derivatives, securities financing and long settlement transactions;
• retaining a simplified version of the SDDT specific reporting template C 34.06S to collect information on an SDDT’s top twenty counterparties in derivatives, securities financing and long settlement transactions. The PRA proposed to collect the C34.06S quarterly; and
• Retaining a simplified version of reporting template C 33.00S for SDDTs to collect exposure data to general governments.

7.27 The PRA received one response to these proposals, querying the need for SDDTs to report template C34.06S quarterly as some firms are currently only required to report template C 34.06 on a semi-annual basis.

7.28 The PRA has considered this comment and further reviewed its initial proposal for the continued collection of C 34.06S. Taking into consideration the request for further simplification of SDDT reporting requirements where possible, the PRA has re-reviewed the data collected through this template and its use in supervision of SDDTs. Based on this analysis, the PRA has decided to descope SDDTs from reporting template C 34.06S entirely.

7.29 The PRA has also re-reviewed the reporting requirements in respect of C 33.00S and its uses for SDDTs considering responses to the CP asking for further simplifications mentioned above. Based on this analysis, the PRA has decided to descope SDDTs from reporting template C 33.00S entirely.

7.30 The PRA has also decided to further simplify the new template C 34.XXS by removing two columns and one row.

Securitisations

7.31 In CP7/24, the PRA proposed to further tailor templates and related instructions on reporting for securitisations for SDDTs. This included reporting templates C 13.01S, C 14.00S and C 14.01, in the latter case with proposed amendments only to reporting instructions.

7.32 The PRA received no comments on these proposals. The only notable change the PRA has made in this near-final policy in relation to securitisation reporting is to create an SDDT-specific version of template C 14.01 and to delete two columns that are not relevant to SDDTs from this template.

Operational risk

7.33 In CP7/24, the PRA proposed to implement reporting template OF 16.00 to collect data in relation to operational risk requirements for SDDTs.

7.34 The PRA received no comments on this proposal. The only notable change the PRA has made in this near-final policy in relation to operational risk reporting is creating an SDDT-specific version of template OF 16.00 though, as explained in paragraph 7.13, this is no different to the template SDDTs would otherwise be required to complete.

Market risk

7.35 In line with the proposal in Chapter 2 of CP7/24 to descope SDDTs from calculating capital requirements for market risk, the PRA proposed in Chapter 7 of CP7/24 to descope SDDTs from most market risk reporting requirements, other than tailored versions of OF 22.00 and OF 90.00 which the PRA proposed to still require from SDDTs.

7.36 The PRA received no comments on these proposals and has not made any significant changes to the templates or reporting instruction changes it consulted on in relation to market risk.

Credit valuation adjustment

7.37 In CP7/24, the PRA proposed to descope SDDTs from having to report credit valuation adjustment (CVA) templates, in line with the proposal in Chapter 2 of CP7/24 to descope SDDTs from Pillar 1 capital requirements for CVA risk.

7.38 The PRA received no comments on this proposal, so has descoped SDDTs from having to report CVA templates in the near-final policy.

Prudent valuation

7.39 In CP7/24, the PRA did not propose any changes to reporting of prudent valuation by SDDTs. However, having taken into consideration the responses received asking that the PRA further simplify reporting for SDDTs as outlined above, the PRA has decided to descope SDDTs from reporting templates C 32.01 to C 32.04. Instead, the PRA considers that by making the amendments to template C 04.00 as described in 7.22 it will still be able to collect the key information on prudent valuation without requiring SDDTs to complete more detailed, separate templates.

Large exposures

7.40 In Chapter 2 of CP7/24, the PRA proposed to replace the calculation of CCR for derivatives by SDDTs with a simpler calculation. In line with this proposal, in Chapter 7 of CP7/24, the PRA proposed amending the reporting instructions for Large Exposures templates C 28.00 and C 29.00 to instruct SDDTs to apply this simplified calculation.

7.41 The PRA received no comments on this proposal, so has implemented the changes in the near-final instructions set out in the appendices to this near-final PS.

Leverage ratio

7.42 In CP 7/24, the PRA proposed amendments to leverage ratio reporting template LV 47.00 and reporting instructions, and amendments to instructions for templates LV 41.00 and LV 44.00. These amendments reflected the proposed simplification of the derivatives exposure calculation for the Leverage Ratio and Large Exposure limit set out in Chapter 2 of CP7/24.

7.43 The PRA did not receive comments in direct response to the proposed reporting amendments; however, one respondent made a more general request that the PRA descope SDDTs from having to report any leverage ratio templates. The respondent argued that most data reported in those templates are already available to the PRA in own funds templates.

7.44 The PRA does not agree that most data collected in the leverage ratio templates are available in own funds templates. For example, key leverage metrics such as the leverage ratio, both including and excluding reserves, and key items in the calculation of the leverage exposure measure provided in LV 47.00 are not available in other own funds templates. The PRA has, however, reconsidered the reporting of leverage ratio templates by SDDTs in light of responses requesting further simplification of reporting for SDDTs (see paragraphs 7.11 and 7.12). Having done so, the PRA considers that, while the granular reporting information provided in these templates is in principle useful for supervising a firm’s leverage position, in the case of SDDTs the relative cost of providing this information for the firm outweighs the supervisory benefit. The PRA has accordingly decided to descope four of the five leverage ratio reporting templates for SDDTs (LV 40.00, LV 41.00, LV 43.00 and LV44.00). SDDTs will continue to be required to report LV 47.00 (see Appendix 15 for the near-final template).

Pillar 2 reporting

7.45 In CP7/24, the PRA proposed to amend Pillar 2A reporting requirements for SDDTs to align with the Pillar 2A proposals outlined in Chapter 3 of that CP. The key proposals were:

• to descope SDDTs from reporting templates FSA076 – FSA079 on credit risk and credit concentration risk;
• to clarify that SDDTs would not be considered ‘significant firms’ for the purposes of Pillar 2A operational risk reporting and would therefore not be required to submit templates FSA072 to FSA075;
• to descope SDDTs from reporting template FSA080 concerning market risk arising on illiquid positions;
• to require SDDTs to report the SDDT specific template FSA071S which provides firm information and Pillar 2 summary data; and
• to amend data item PRA111 (which collects data on stress testing) to add a row to capture the new Single Capital Buffer for SDDTs.

7.46 The PRA received no comments on its Pillar 2 reporting proposals, so has implemented the changes set out above in the appendices to this near-final PS.

Additional comments received

7.47 The PRA also received comments from two respondents who considered that the SDDT reporting proposals should be implemented at the same time as changes arising from the PRA’s wider work on reforming banking data reporting so that SDDTs would only need to implement changes once.

7.48 Wider banking reporting reform work by the PRA under its FBD programme is progressing.^{footnote [61]} Key priorities for FBD in 2025/26 are: to consult on proposals for initial deletions of underused or duplicative whole templates;^{footnote [62]} to develop a firm-facing portal to facilitate interactions with the PRA; and to collaborate with industry and the FCA, at both senior and working level, to shape the future strategy for FBD.

7.49 The PRA considers it important that the reporting changes set out in this near-final PS be in place to support the 1 January 2027 implementation of the simplified capital regime for SDDTs (see paragraphs 1.51-1.53 in Chapter 1) to allow the PRA to supervise SDDTs in accordance with the new regime. Implementing these reporting changes on that timeline would also allow SDDTs to benefit from the reporting simplifications, including descoping them from 51 templates.

7.50 The future strategy for FBD will determine the scope, prioritisation and timing of the PRA’s future work on reporting changes, which will mainly take place beyond the implementation timeline for the simplified capital regime for SDDTs. The PRA therefore plans to implement the reporting changes set out in this near-final PS in line with the implementation date of 1 January 2027. Reporting with a reference date before 1 January 2027 (for example, quarterly reporting with a reference date of 31 December 2026) will therefore need to be submitted on the basis of the reporting requirements that apply on that reference date, even where the remittance date for the reporting is after 1 January 2027. Reporting with a reference date on or after 1 January 2027 will need to be made under the new reporting requirements for SDDTs.

7.51 Another respondent requested that the PRA allow SDDTs carrying out a regulatory reporting technology change programme to adopt the changes to reporting set out in CP7/24 early so that they did not change reporting processes which would subsequently not be required.

7.52 The PRA has considered this comment but does not consider it appropriate to allow firms to adopt reporting changes earlier than the intended implementation date because:

• of the complexity that such a policy would add to the system changes that the PRA is already working to deliver for the reporting changes set out in this near-final policy statement;
• this in practice would require early implementation of the rest of the SDDT regime to maintain alignment between reporting and the prevailing prudential requirements; and
• allowing voluntary early adoption of part of the overall simplified capital regime for SDDTs would make the supervision of the SDDT population as a whole more complex against the regulatory requirements in place at the time.

7.53 The approach to implementation planning is a firm specific decision and will vary according to the priorities of each firm. By maintaining the 1 January 2027 implementation date, the PRA considers that it is giving firms sufficient time to flexibly plan for reporting implementation within their businesses. Firms should discuss any individual challenges with their supervisors.

7.54 Another respondent requested that the PRA work with reporting software providers to ensure these vendors can provide reporting solutions to SDDTs at a low cost. The respondent was concerned that creating divergence from the main Basel 3.1 reporting could create complexity for vendors, with the associated costs likely to be passed on to SDDTs.

7.55 The PRA has considered this comment and recognises the importance of minimising the compliance burden on SDDTs. The PRA has created significant alignment to the Basel 3.1 reporting framework in its design of SDDT capital reporting requirements and considers that the reduction in reporting requirements for SDDTs, for example by descoping them from 51 templates, should reduce reporting costs for SDDTs over time.

PRA objectives analysis

7.56 In Chapter 7 of CP7/24 the PRA set out why it considered the proposed changes to SDDTs’ reporting would advance the PRA’s objectives. The PRA considers this analysis remains valid subject to the following updates.

7.57 The PRA considers that the additional reporting changes set out in this chapter (in particular the descoping of SDDTs from an additional 13 templates) would further strengthen the impact of the reporting changes set out in CP7/24 on the advancement of the PRA’s objectives.

‘Have regards’ analysis

7.58 In developing the near-final policy set out in this chapter, the PRA has had regard to its framework of regulatory principles.

7.59 In Chapter 7 of CP7/24 the PRA set out the regulatory principles it considered most material to the proposed changes to SDDTs’ reporting. The PRA considers this analysis remains valid to the near-final policy set out in this chapter.

Taxonomy implementation

7.60 The PRA currently collects banking data using two different taxonomies. COREP is reported to the PRA using the European Banking Authority (EBA) authored taxonomy (version 3.0). The Bank of England Banking Taxonomy (version 3.6.0) is used to report other banking reporting including certain PRA and ring-fenced body (RFB) titled data items.

7.61 In CP7/24, the PRA set out its intention to implement its reporting proposals for SDDTs within a taxonomy authored by the Bank of England. For reporting originating from COREP, the Bank’s approach would mean SDDTs would no longer report own funds and own funds requirements to the PRA using an EBA authored taxonomy from the implementation date. In CP7/24, the PRA explained further that the reporting of Large Exposures would remain via EBA taxonomy version 3.0 as no changes are being made to the existing Large Exposures templates.

7.62 The PRA published its public working draft of the taxonomy on 3 April 2025 and received one response querying certain technical aspects of the taxonomy that do not require any changes to data modelling, validations or have any reporting implications. The PRA does not consider this to impact its near-final policy on reporting as outlined in this chapter. The PRA will release a near-final version of its public working draft taxonomy following publication of this near-final PS.

7.63 As noted in paragraph 7.15, the PRA has renamed certain near-final templates set out in this near-final PS in order to distinguish these from those currently reported, and reporting submitted by firms not in scope of this near-final PS. The near-final template prefixes are set out in the near-final mapping of reporting template codes (Appendix 14) and the near-final Rule instrument included in Appendix 2. The near-final templates for reporting of own funds and own funds requirements will have a prefix of ‘SC’.

7.64 The PRA has determined that the templates used to collect data on Pillar 1 own funds and own funds requirements for SDDTs will be reported in a reporting module (or ‘data item’) labelled PRA116 ‘Banking Reporting (Own Funds) for SDDTs’. Capital+ templates will be renumbered as PRA117 and PRA118.

7.65 Data items PRA111 and FSA071S are not collected via a taxonomy. Revised data items for these two templates (with an updated template code of PRA119 for the template consulted on as FSA071S) have been provided in the appendices to this near-final PS.

7.66 The PRA is not making any changes to the data collection system or the format of reporting used for any of the data items referenced in this near-final PS.

8: Operating the SDDT Regime

Introduction

8.1 This chapter provides feedback to responses to Chapter 8 of CP7/24, which set out the PRA’s proposals as to how it would operate the SDDT prudential regime upon the implementation of the policies set out in this near-final PS, including the PRA’s proposals to revoke the Interim Capital Regime (ICR) and the related SoP3/23 to achieve the full implementation of the SDDT regime. This chapter also sets out the PRA’s updated near-final policy on the ICR and the PRA’s near-final policy on operating the SDDT regime following the consultation.

8.2 In CP7/24, the PRA set out its proposed approach to operating the SDDT regime and how it would implement the proposals outlined in the CP. Key proposals included:

• revoking the rules that give effect to the ICR when the simplified capital regime for SDDTs comes into force;
• providing further details on the process for entering and leaving the SDDT regime;
• conducting a data collection exercise and off-cycle review of firm-specific Pillar 2 capital requirements for firms that have consented to the SDDT modification by consent (MbC); and
• setting a deadline for SDDT-eligible firms which have not already consented to become an SDDT to consent, or inform the PRA of their intent to consent, to the SDDT MbC if they want to be subject to the SDDT regime on the proposed implementation date of the simplified capital regime for SDDTs. 

8.3 The PRA received four responses to its proposed approach to operating the SDDT regime. Comments focused particularly on the following points:

• The PRA’s plans to introduce the ICR as an option for SDDT-eligible firms; and
• The details of how the PRA’s proposed off-cycle review of firm-specific Pillar 2 capital requirements and expectations ahead of the implementation of the SDDT capital regime would operate.

8.4 The PRA did not receive comments on the other aspects of its proposals in Chapter 8 of CP7/24.

8.5 Having considered the responses to the consultation, the PRA has decided that its proposals as to how it would operate the SDDT prudential regime will remain broadly unchanged. The main exception is the ICR, which, as mentioned in Chapter 1, the PRA has decided is no longer required because the Phase 2 measures will be implemented on the same date as Basel 3.1, 1 January 2027. This change is not expected to materially impact the PRA’s policy for operating the SDDT regime.

8.6 In finalising the policy, the PRA has also made a number of other minor amendments and clarifications to SoP2/23 which are described later in this chapter.

8.7 The appendices to this near-final PS contain the PRA’s near-final policy which will:

• amend the existing SDDT Regime – General Application Part and the PRA Rulebook Glossary at the time of the publication of the final PS;
• amend SoP2/23 (Appendix 7), which was published previously in PS15/23. As outlined in Chapter 1, the changes to this SoP would take effect at the time of the publication of the final PS; and
• delete SoP3/23 – Operating the Interim Capital Regime at the time of the publication of the final PS.

8.8 There are more details about the responses and the near-final policy in the sections below. These sections are structured broadly along the same lines as Chapter 8 of CP7/24.

8.9 As in the rest of this PS, for the purposes of this chapter, any references in relation to an ICR firm should, where appropriate, be treated as applicable to both an ICR firm and an ICR consolidation entity.

Updated near-final policy for the ICR

Revocation of the ICR

8.10 In PS17/23, the PRA set out its near-final policy to implement the ICR, a temporary regime that would have allowed SDDT-eligible firms to choose (via a MbC) to remain subject to requirements equivalent to the existing Capital Requirements Regulation (CRR) capital rules until the implementation date of the simplified capital regime for SDDTs. In PS9/24, the PRA updated the near-final ICR rules, and in PS19/24 - Strong and Simple Framework: The definition of an Interim Capital Regime (ICR) firm, the PRA made rules relating to the definition of an ICR firm and ICR consolidation entity. The PRA also published the final SoP3/23.

8.11 In CP7/24, the PRA proposed that the ICR would cease to apply upon the implementation date of the simplified capital regime for SDDTs. The PRA proposed to achieve this by revoking the rules that would have given effect to the ICR, and that the revocation would take effect when the simplified capital regime for SDDTs came into force. The MbCs held by ICR firms would also end because of the revocation. Firms and consolidation entities operating under the ICR (ICR firms and ICR consolidation entities) would immediately move onto their chosen prudential framework upon the revocation.

8.12 Three respondents generally welcomed the PRA’s plans to introduce and operate the ICR as an option for SDDT-eligible firms.

8.13 When the ICR was initially proposed in CP16/22, and at the time of the publications mentioned above, the PRA had planned to implement the Basel 3.1 standards before the simplified capital regime for SDDTs. The PRA therefore proposed the ICR to avoid SDDT-eligible firms having to apply the Basel 3.1 standards before implementing the simplified capital regime for SDDTs at a later date. The ICR would have also avoided the PRA having to reset Pillar 2 for these firms twice – first for the implementation of the full Basel 3.1 standards, and again for the implementation of the simplified capital regime for SDDTs.

8.14 In January 2025, the PRA announced that, having consulted with HM Treasury, it had decided to move back the implementation of Basel 3.1 to 1 January 2027.^{footnote [63]} As set out in Chapter 1, the PRA has also decided to proceed with the proposed implementation date for the simplified capital regime for SDDTs of 1 January 2027, to allow SDDTs to experience the benefits of the capital simplifications as soon as possible. This means that both Basel 3.1 and the simplified capital regime for SDDTs will be implemented on the same date, and therefore the ICR is no longer required. The PRA’s revised near-final policy is now therefore not to make the final rules that give effect to the ICR. Consequently, the PRA will not need to revoke those rules with effect from the implementation date of the simplified capital regime for SDDTs.

8.15 The PRA will instead revoke the existing rules relating to the definition of an ICR firm and an ICR consolidation entity, which were published in PS19/24 and took effect from 29 November 2024 (see Annex D of Appendix 2). The PRA will also delete SoP3/23 at the time of the publication of the final PS. Since the ICR is no longer required, the PRA intends that this revocation will take effect at the time of the publication of the final PS for the simplified capital regime for SDDTs, rather than from the implementation date of that regime. The ICR MbCs held by ICR firms will also end because of the revocation.

8.16 On 1 January 2027, SDDTs will immediately move onto the simplified capital regime for SDDTs. Non-SDDTs, whether they are SDDT-eligible or not, will immediately move onto the full Basel 3.1 standards.

Migration of ICR permissions

8.17 In CP7/24, the PRA also proposed to use transitional rules to migrate the permissions granted to firms and consolidation entities under the ICR to equivalent permissions in relation to the provisions for their chosen prudential framework (the full Basel 3.1 standards or the SDDT regime) upon the revocation of the ICR.

8.18 The PRA did not receive any comments relating to this proposal. However, as outlined in paragraphs 8.14 - 8.15, there will no longer be an ICR. The PRA will therefore not make the proposed transitional rules to migrate permissions under the ICR.

8.19 The PRA has set out in CP16/22 and PS9/24 (in relation to Basel 3.1) that it expects HMT to ‘save’ certain existing permissions, and in PS19/25 (in relation to restatement of CRR requirements) that it expects HMT to ‘save’ all permissions granted under the relevant parts of the CRR. Where permissions being saved relate to rules that apply to SDDTs and are capable of being relevant to SDDTs, the PRA expects that HMT’s saving of existing permissions will apply to SDDTs in the same way as it applies to other firms.

Accessing the SDDT regime

SDDT-eligible firms’ access to Phase 2 measures

8.20 The PRA proposed that at the point at which the Phase 2 measures are implemented, they would automatically apply to all SDDTs. Firms would need to consent only once to an MbC to become an SDDT (and CRR consolidation entities would need to consent only once to an MbC to become an SDDT consolidation entity) to opt into the regime and access all the simplifications for SDDTs.

8.21 The PRA did not receive any comments relating to this proposal. The PRA has decided to make no changes to its policy as proposed in CP7/24.

SDDT-eligible firms’ engagement with the PRA prior to taking up the SDDT MbC

8.22 SoP2/23 notes that the PRA is prepared to offer SDDT-eligible firms an MbC by which these firms could choose to operate under the SDDT regime by consenting to the MbC. In CP7/24, the PRA proposed to update SoP2/23 to provide further details on this process, including that:

• a firm that wishes to become an SDDT would be expected to engage with its supervisors early prior to taking up the SDDT MbC;
• once an SDDT-eligible firm has notified the PRA of its intention to consent to the SDDT MbC, the PRA would consider several practical matters, such as when and how to update the firm’s Pillar 2A requirements and its expectations of the capital the firm should maintain under the Single Capital Buffer (SCB). The PRA would then coordinate with the SDDT-eligible firm on timings for the firm to formally consent to the SDDT MbC; and
• where an SDDT-eligible firm has not coordinated closely with the PRA on its process and timeline to become an SDDT, the PRA will need more time to plan for the relevant changes to its processes prior to issuing the modification direction.

8.23 The PRA did not receive any comments relating to these proposals. The PRA has decided to make no changes to its policy as proposed in CP7/24.

Other changes

8.24 The SDDT domestic activity criterion allows firms to treat relevant credit exposures as located in the UK if they would qualify as ‘residential loans to individuals’ for the purposes of the Mortgage Lending and Administration Return (MLAR), even if they are not otherwise treated as UK exposures.^{footnote [64]} Having further considered the application of this criterion, the PRA has decided to add new paragraphs 3.9–3.11 in SoP2/23 to clarify how this treatment may also apply to certain financing arrangements.

8.25 These paragraphs explain that some firms may offer financing arrangements for home purchases that are not structured as conventional regulated mortgage contracts but are economically equivalent to ‘residential loans to individuals’ as defined in the MLAR. The PRA notes in SoP2/23 that it may be appropriate to include such arrangements in the calculation of relevant credit exposures located in the UK and the PRA may therefore grant a modification to the SDDT criteria to reflect this treatment.

8.26 The PRA has also decided to make minor drafting changes to SoP2/23 to clarify how a CRR consolidation entity can access the SDDT regime.^{footnote [65]}

PRA review of firms’ Pillar 2 requirements prior to the Phase 2 implementation date

8.27 In CP7/24, the PRA proposed to conduct an off-cycle review of firm-specific Pillar 2 capital requirements for ICR firms, as well as non-ICR firms that have consented to the SDDT MbC ahead of the implementation date of the simplified capital regime for SDDTs. The off-cycle review for these firms would aim to adjust a firm’s Pillar 2 requirements and buffers in accordance with the prudential framework the firm has chosen to move to once the Phase 2 measures have been implemented (ie the Basel 3.1 standards or the SDDT regime). The PRA would also apply a SME lending adjustment and infrastructure lending adjustment to ensure that overall capital requirements for SME and infrastructure exposures do not increase as part of this off-cycle review.

8.28 The PRA also set out its plan to communicate to firms the adjusted Pillar 2 requirements and expectations (ie the outcome of this off-cycle review) ahead of the implementation date of the simplified capital regime for SDDTs so that firm-specific requirements and expectations would be updated at the same time as the firm’s chosen prudential framework is implemented. The PRA proposed to conduct a data collection exercise for ICR firms, and non-ICR firms that have consented to the SDDT MbC, to inform the off-cycle review, with further details to be set out in due course.

8.29 As stated in CP7/24, the PRA does not plan to reset firms’ Pillar 2A capital requirements fully through a full Capital Supervisory Review and Evaluation Process (C-SREP) process before the implementation date. This is because the reset to a firm’s Pillar 2 capital requirements, using the proposed simplified Pillar 2A methodologies and non-cyclical stress test, would occur over time in line with the firm’s C-SREP cycle.

8.30 The PRA received no substantive comments on these proposals. Consequently, the PRA has decided to make no changes to this proposal, other than to update its approach to take into account that there will no longer be an ICR, as outlined earlier in paragraphs 8.14-8.15.

8.31 The PRA therefore plans to conduct an off-cycle review of firm-specific Pillar 2 capital requirements and expectations for all SDDTs ahead of 1 January 2027, the date on which all SDDTs will immediately move on to the simplified capital regime for SDDTs. As Basel 3.1 will be implemented at the same time as the simplified capital regime for SDDTs, this off-cycle review will take place in parallel with the Basel 3.1 Pillar 2 off-cycle review set out in Chapter 6 of PS17/23. As part of this off-cycle review, the PRA will apply firm-specific SME and infrastructure lending adjustments, as set out in paragraphs 3.96 and 3.98.

8.32 Three respondents requested further clarity on the timing and details of the Pillar 2 off-cycle review ahead of the implementation of the simplified capital regime for SDDTs. The PRA is providing further details on the off-cycle review for SDDTs, including details on the data collection exercise for firms, in a separate communication.^{footnote [66]}

Timeline for SDDT MbCs prior to the Phase 2 implementation date

8.33 In CP7/24, the PRA proposed to set out a deadline for SDDT-eligible firms which have not already consented to become SDDTs to consent, or inform the PRA of their intent to consent, to the SDDT MbC if they want to be subject to the SDDT regime on the implementation date of the Phase 2 measures. The PRA also proposed that if a firm has not informed the PRA of its intention by the deadline set, the PRA would then assume that the firm wishes to be subject to the full Basel 3.1 standards from the implementation date of the Phase 2 measures.

8.34 The PRA explained that an SDDT-eligible firm would be able to consent to the SDDT MbC at any point after the deadline, but it would be subject to the full Basel 3.1 standards when these are implemented, before moving onto the SDDT regime at a later date.

8.35 The PRA did not receive any comments relating to these proposals and has decided to make no changes to this approach. The PRA has determined that 31 March 2026 is the deadline by which SDDT-eligible firms which have not already consented to become SDDTs should consent, or inform the PRA of their intent to consent, to the SDDT MbC if they want to be subject to the SDDT regime on the implementation date of 1 January 2027.

8.36 An SDDT-eligible firm that has not consented to the SDDT MbC, or has not informed the PRA of its intention to do so by 31 March 2026 may be required to implement the full Basel 3.1 standards from 1 January 2027.

Leaving the SDDT regime

Approach to a firm leaving the SDDT regime

8.37 In CP7/24, the PRA proposed to amend SoP2/23 to include reference to a firm leaving the SDDT regime of its own accord.

8.38 The PRA also proposed to update SoP2/23 to clarify that:

• An SDDT that wishes to leave the regime should engage with its supervisors to discuss its plans and explain its reasons for seeking to leave at the earliest opportunity before requesting that the PRA revokes its modification;
• An SDDT in this position will generally be able to prepare for leaving the SDDT regime so that by the time it requests the revocation of its modification direction it will be able to comply almost immediately with the measures that will apply to it if it ceases to be an SDDT;
• Early engagement with the PRA will allow the time needed for the firm and the PRA itself to prepare for any necessary changes associated with a request to leave the SDDT regime. Such steps would need to be completed before the PRA would be able to accede to a request for revocation of a modification direction;
• When considering when to revoke a firm’s modification direction, in addition to considering the time a firm would need to comply with the measures that would apply to it when it ceases to be an SDDT, the PRA will also consider the time needed by the PRA to make any necessary changes, and any information needed from the SDDT.

8.39 The PRA did not receive any comments relating to its proposals for leaving the SDDT regime. The PRA has decided to make no changes to its policy as proposed in CP7/24.

Approach to an SDDT that wishes to opt out of the Phase 2 measures

8.40 In CP7/24, the PRA proposed not to develop a specific transitional arrangement for firms that choose to leave the SDDT regime upon seeing the final measures for the simplified capital regime for SDDTs. This is because the PRA considers that firms will have sufficient time after reviewing the measures for the simplified capital regime for SDDTs to move away from the Phase 1 simplifications to liquidity and disclosure requirements prior to the implementation date of the simplified capital regime for SDDTs.

8.41 The PRA did not receive any comments relating to its approach to an SDDT that wishes to opt out of the Phase 2 measures. The PRA has decided to make no changes to its policy as proposed in CP7/24.

Re-entering the SDDT regime

8.42 The PRA proposed not to introduce specific measures to prohibit a firm from making multiple changes to the prudential regime it chooses to operate under, but instead proposed to amend SoP2/23 to set out that the PRA would not expect firms to frequently exit and re-enter the SDDT regime.

8.43 The PRA received no responses to these proposals and will implement these as set out in CP7/24.

PRA objectives analysis

8.44 In Chapter 8 of CP7/24 the PRA set out why it considered the proposals as to how it would operate the SDDT prudential regime upon the implementation of the SDDT capital regime would advance the PRA’s objectives. With the exception of the decision to not implement the ICR, the PRA considers this analysis remains valid subject to the following updates.

8.45 By commencing the simplified capital regime for SDDTs at the same time as Basel 3.1, there is no need for SDDT-eligible firms to have to opt into an interim capital regime or implement the full Basel 3.1 standards in order to move from the current CRR regime to the SDDT capital regime. This will be simpler for SDDTs, which could in turn reduce their costs and therefore advance the PRA’s secondary competition objective.

‘Have regards’ analysis

8.46 In developing the near-final policy set out in this chapter, the PRA has had regard to its framework of regulatory principles.

8.47 In Chapter 8 of CP7/24 the PRA set out the regulatory principles it considered most material to the proposals as to how it would operate the SDDT prudential regime upon the implementation of the policies set out in this near-final PS. The PRA considers this analysis remains valid subject to the following updates.

• Transparency (FSMA regulatory principles): The amendments to SoP2/23 would further clarify and enhance the general transparency of requirements related to accessing the SDDT regime.
• Efficient and economic use of PRA resources (FSMA regulatory principles): The plan to not implement the ICR would support a more efficient use of resources because the PRA would no longer need to make rules to implement the ICR and subsequently revoke it. It would also make the implementation of the SDDT capital regime easier for the PRA.

9: Cost benefit analysis

Introduction

9.1 This chapter provides feedback to responses to Chapter 9 of CP7/24, which set out an aggregated cost benefit analysis (CBA) of proposals in the CP.

9.2 In CP7/24, the aggregated CBA included the following elements:

• Case for action (eg, the rationale for the strong and simple framework and how the proposals in the CP would contribute to advancing PRA objectives);
• Overall approach to the CBA (eg, approach to the use of quantitative and qualitative information, key assumptions, the baselines for comparison);
• Benefits and costs of applying elements of the Basel 3.1 standardised approaches to SDDTs;
• Benefits of the other parts of the proposals (ie, a description of the expected benefits, for PRA-regulated firms and the PRA, of the proposals set out in the CP apart from the application of elements of the Basel 3.1 standardised approaches);
• Costs of the other parts of the proposals;
• Impact on overall capital requirements and buffers: analysis of the impact of applying elements of the Basel 3.1 standardised approaches to SDDTs and the other parts of the proposals on SDDTs’ capital requirements and buffers;
• Summary of the expected benefits and costs of the proposals set out in the CP apart from the application of elements of the Basel 3.1 standardised approaches, and sensitivity analysis.

9.3 Overall, the PRA assessed that the proposal would generate positive net benefits. It estimated that the present value of the net benefits of the proposals apart from the application of elements of the Basel 3.1 standardised approaches would be between £101 million and £226 million (see Table 11 in CP7/24).

9.4 Seven respondents to CP7/24 commented on the aggregated CBA. Comments focused particularly on the following areas of the CBA:

• The benefits and costs of the proposed changes to reporting requirements;
• The magnitude of the benefits from making SDDTs’ capital buffers more certain; and
• The analysis of the impact of the proposals on overall capital requirements and buffers in the SDDT capital regime.

9.5 This chapter also provides updates to the estimated benefits for the near-final policy for the Internal Capital Adequacy Assessment Process (ICAAP) and reporting requirements in the SDDT capital regime.

Feedback

9.6 This section follows the structure of Chapter 9 in CP7/24.

Overview

9.7 One respondent commended the PRA for producing a thorough CBA of the proposals in CP7/24.

9.8 The PRA welcomes this comment on the aggregated CBA. For more details about the PRA’s approach to CBA, see SoP14/24 – The Prudential Regulation Authority’s approach to cost benefit analysis.

Part 1: Benefits and costs of the Basel 3.1 standardised approaches

9.9 In Part 1 of the aggregated CBA, the PRA discussed the benefits and costs of applying the Basel 3.1 standardised approach to credit risk (including the approach to credit risk mitigation) and the standardised approach to operational risk relative to the standardised approaches that apply currently. This included estimates of per-firm costs of implementing the Basel 3.1 standardised approaches to credit risk (CR SA) and operational risk (OR SA); see Table 9 in CP7/24.

9.10 Two respondents argued that the costs of implementing Basel 3.1 would be higher than the estimates in Table 9.

9.11 One of those respondents argued the estimates in Table 9 did not adequately capture the costs of the entirely new reporting returns that would be introduced under the Basel 3.1 CR SA. It asked the PRA to disclose more of the analysis and assumptions behind the table. One of the respondents noted that large SDDTs have already incurred costs related to Basel 3.1 equal to the estimates in Table 9 in CP7/24.

9.12 Table 9 in CP7/24 reflected the costs to SDDTs of implementing the Basel 3.1 standardised approaches to credit risk and operational risk that were collected through a survey conducted for the CBA in CP16/22 (‘Basel 3.1 cost survey’).^{footnote [67]} Table 9 was based on survey responses from small and medium-sized firms. These costs were defined in the Basel 3.1 survey as administrative costs, costs of staff training and recruitment, costs related to IT systems, software, and interface, costs related to senior management review time, and costs of external (eg IT and accounting) consulting. Costs of the changes to reporting related to Basel 3.1 were not captured among these costs. However, the Basel 3.1 survey asked for information about costs associated with complying with reporting requirements, which the PRA would use to inform its assessment of the costs of the reporting changes under Basel 3.1. The PRA used these survey results in Table 4 in the CBA in CP16/22.

9.13 Having considered these responses, the PRA has used the Basel 3.1 cost survey results to estimate the costs to SDDTs of the changes to reporting under Basel 3.1. The financial cost of reporting changes associated with the UK's implementation of Basel 3.1 for small and medium firms are broken out in Table 3. The total one-off costs and annual ongoing costs of implementing these reporting changes for SDDT-eligible firms are estimated to be £2.13 million and £1.96 million, respectively, if the average costs in Table 3 are multiplied by the estimated number of SDDT-eligible firms.^{footnote [68]} The present value of those costs is around £19 million. Combining the reporting-related costs with the costs in Table 9 in CP7/24, the total costs are around 27% and 152% higher, respectively, than the total costs based on the values in Table 9. However, the costs associated with reporting changes may be lower for SDDTs than these estimates suggest because the survey results were for reporting and disclosure changes related to all of Basel 3.1. SDDTs would be exempt from some elements of Basel 3.1 (see Chapter 2 of this near-final PS).

9.14 One of the respondents asked how the analysis and assumptions behind Table 9 compare with a cost survey about the Bank of England’s and FCA’s Transforming Data Collection project. The PRA has considered this response by focusing on the data on reporting costs that were collected through the Basel 3.1 cost survey, rather than the data behind Table 9 in CP7/24, because, for reasons set out above, those data are more relevant to the response.

9.15 The Basel 3.1 cost survey was undertaken during 2021. It collected the data on reporting costs associated with Basel 3.1 by asking firms to quantify the costs associated with complying with reporting requirements introduced in previous years. The survey asked for estimates of costs resulting from the implementation of the EBA reporting framework 2.9, implementation of the EBA guidelines on disclosure of non-performing and forborne exposures, and the preparation of COREP own funds and own funds requirements. The survey about the Transforming Data Collection project was carried out in May 2024. It was conducted to help the Bank and FCA understand the cost of all reporting, including regulatory, statistical, and stress testing reporting, and where cost savings and benefits might be realised. Over one hundred firms were surveyed and there was a 35% response rate; seven SDDTs responded.^{footnote [69]} The responses suggested the overall costs of regulatory reporting to banking sector were between £1.5 billion and £2 billion per annum, which was driven disproportionately by larger firms.^{footnote [70]}

9.16 The other respondent stated the estimates in Table 9 did not capture the costs to firms of having to hold separate valuation data for calculating capital requirements and for risk management and pricing purposes.

9.17 Having considered this response, the PRA considers the costs to firms of having to hold separate valuation data for calculating capital requirements and for risk management and pricing purposes was probably captured by the section of the Basel 3.1 cost survey that was behind Table 9 in CP7/24. Several respondents to the Basel 3.1 cost survey mentioned in their submissions that they had accounted for the costs of having to use separate valuation data under the Basel 3.1 standardised approach to credit risk.

Part 2: Benefits of the other proposals

9.18 In this section of the aggregated CBA, the PRA discussed the benefits of the proposals in CP7/24 apart from the application of the Basel 3.1 standardised approaches to credit risk and operational risk. The benefits were defined relative to the capital regime that SDDT-eligible firms would face outside the SDDT regime.^{footnote [71]}

9.19 The aggregated CBA set out that the Pillar 2A and Single Capital Buffer (SCB) proposals would make capital requirements and expectations more predictable and certain for SDDTs and this could lead to several benefits for SDDTs (eg SDDTs could invest fewer resources into making capital and business planning decisions).

9.20 One respondent argued that these benefits were overstated in the aggregated CBA because the PRA would retain discretion to increase the SCB. Another respondent said the costs of understanding the complex interaction between the CCyB and its PRA buffer outside the SDDT regime, which would be a benefit of the proposals because SDDTs would no longer be subject to the Countercyclical Capital Buffer (CCyB), would be lower than the estimates in paragraph 9.40 in CP7/24. The same respondent claimed the effort needed to assess the stress-testing component of the SCB would be similar to the effort needed to assess the stress-testing component of buffers outside the SDDT regime.

9.21 Having considered these responses, the PRA considers the SDDT capital regime outlined in this near-final PS would make capital requirements and expectations more predictable and certain for SDDTs, with resulting benefits for SDDTs. Furthermore, the PRA has made changes in the near-final policy that would further help SDDTs predict their capital requirements and buffers: the PRA has made changes to the Pillar 2A methodology for operational risk (see Chapter 3) and provided information about the capital calculation for a firm with an RMG scalar (see Chapter 4). The aggregated CBA in CP7/24 did not include a benefit from the stress-testing component of the assessment process for setting the SCB being simpler than the stress-testing component of the assessment process for setting buffers outside the SDDT regime; the aggregated CBA only referred to SCBs being based on a stress test scenario that would make buffers less variable in the SDDT regime than outside the regime (see paragraph 9.37 in CP7/24).

9.22 The aggregated CBA included quantitative estimates of the cost savings for SDDTs from the proposed reductions in reporting requirements.^{footnote [72]}

9.23 One respondent said they agreed with the PRA’s analysis of the cost savings from reduced reporting requirements. The respondent characterised these cost savings as ‘modest’.

9.24 The PRA welcomes this comment.

Part 2: Costs of the other proposals

9.25 In this section of the aggregated CBA, the PRA discussed the costs of the proposals in CP7/24 apart from the application of the Basel 3.1 standardised approaches to credit risk and operational risk. The costs were defined relative to the capital regime that SDDT-eligible firms would face outside the SDDT regime.

9.26 The aggregated CBA included estimates of SDDTs’ one-off costs of implementing the amended reporting templates that they would not face outside the SDDT regime. The PRA estimated the one-off costs could be between just over £800 and just over £1,600 per SDDT.

9.27 One respondent claimed these costs would be higher (but that it still welcomed the ongoing cost savings associated with the proposed reporting simplifications). Another respondent said the aggregated CBA had missed the costs of having to pay a software provider to develop and maintain the COREP templates that are specific to SDDTs. However, this respondent agreed with the aggregated CBA that the internal costs of implementing the proposed reporting templates would be low. The respondent did not include quantitative information about the magnitude of one-off costs of implementing the amended reporting templates and paying software providers to develop the COREP templates for SDDTs.

9.28 The PRA considers it is unlikely an SDDT would incur ongoing costs of maintaining the specific templates for SDDTs that would be higher than the ongoing costs of maintaining templates it would face outside the SDDT regime.

9.29 The aggregated CBA in CP7/24 included estimates of one-off costs of implementing the amended reporting templates a firm would not face outside of the SDDT regime. The methodology the PRA used to estimate these costs assumed the costs would equal the number of new cells in the templates multiplied by a per-cell cost of £5 or £10.^{footnote [73]} The per-cell costs were calibrated based on the Basel 3.1 cost survey results (see paragraph 9.15). The survey asked firms to incorporate costs due to consultants’ fees. The implicit assumption in linking one-off costs to the number of new cells is that stopping the reporting of cells would not generate one-off costs. Since the changes to reporting templates proposed in CP7/24 were mainly reductions in cells that must be reported, rather than increases in cells that must be reported, the one-off costs in the aggregated CBA were low.

9.30 One respondent argued that the aggregated CBA significantly underestimated the costs of the proposed changes to reporting because it did not account for the need for SDDTs to implement a set of new regulatory returns under the proposals in CP7/24 ahead of any changes arising from the PRA’s wider work on reforming banking data reporting. The respondent argued this approach would require SDDTs to ‘dig up the road twice’ for regulatory reporting.

9.31 The PRA has since announced in CP8/25 a new programme, Future Banking Data (FBD).

9.32 Having considered this response, the PRA considers that the approach used in CP7/24 to estimate the one-off costs of implementing the proposed reporting changes was appropriate. As set out in paragraph 9.29, the one-off costs were based on the number of new reporting cells that SDDTs would face in the SDDT capital regime which they would not face outside the regime under this approach. The approach made no assumptions about other reporting changes that SDDTs might be subject to (in the SDDT regime or outside the regime). Future consultations on changes to reporting requirements would include their own CBAs.

9.33 Respondents made related comments on the reporting proposals. See paragraphs 7.48-7.50 in Chapter 7 for the PRA’s feedback on these comments.

9.34 The aggregated CBA included a qualitative description of other one-off costs SDDTs might face under the proposals in CP7/24 because the proposals would significantly change the way capital requirements and buffers would be set for SDDTs.

9.35 One respondent highlighted that the implementation of the proposed stress testing framework for SDDTs would create costs for SDDTs. The respondent pointed to the costs of employing specialist credit-risk modelling resources to update stress testing models.

9.36 Having considered this response, the PRA does not consider the implementation of the stress testing framework for SDDTs would create significant additional costs for SDDTs. While the framework implies an SDDT would have a scenario that is different from the one the PRA would publish for firms outside the SDDT regime^{footnote [74]}, there would be strong similarities between these scenarios and how a firm would use them. The example scenarios appended to this near-final PS (Appendix 16) illustrate that the SDDT scenarios would look similar to the scenarios for firms outside the SDDT regime. An SDDT would use the SDDT scenarios as a template and severity benchmark to support its own ICAAP stress testing scenario design process. Outside the SDDT regime, a firm would use the scenarios published by the PRA for these firms in the same way.

Impact on overall capital requirements and buffers

9.37 In this section of the aggregated CBA, the PRA presented modelling of the impact of the proposals set out in CP7/24 on SDDT-eligible firms’ capital requirements and buffers. It focused on the impact on the top of the capital stack, ie the sum of a firm’s capital requirements and buffers. Chart 3 in that section of the aggregated CBA in CP7/24 showed the capital stack for SDDTs under the proposals, outside the SDDT regime, and under the current capital framework. It showed that the stack under the proposals was around 40 basis points of Basel 3.1 RWAs higher than the current stack and around 40 basis points lower than the stack outside the SDDT regime.

9.38 One respondent pointed out that current CCyB levels were used to model firms’ capital stacks outside of the SDDT regime. It argued the aggregated CBA should have included a comparison where through-the-cycle CCyB levels were used instead while adjusting for SDDTs’ more limited ability to raise capital to accommodate changes in capital requirements and buffers.

9.39 Having considered this response, the PRA considers it was appropriate to assume a CCyB rate equal to 2% of RWAs to model SDDT-eligible firms’ capital stacks outside the SDDT regime, as well as current capital stacks. This is because 2% equals the positive neutral rate for the UK CCyB set out in the FPC’s approach to setting the CCyB.^{footnote [75]} The FPC expects to set a positive neutral rate of around 2% when indicators of underlying cyclical financial vulnerabilities are at or around their long-term historical average and an assessment of banks’ resilience to potential and actual shocks suggests they are likely to be able to absorb a shock rather than amplify it.^{footnote [76]}

9.40 One respondent included its estimates of how its capital stack (in £ terms) could change under the proposals compared to its current stack. These showed that its stack under the proposals would be higher than its current stack and that this was mainly driven by the proposed Pillar 2A methodologies for SDDTs. It added that its buffers would decline under the proposals. The same respondent argued that the SDDT capital regime should be designed so the capital stack – including both the Pillar 2A and buffer components of the stack – should be lower than the current stack. It pointed to the improved risk capture in Pillar 1 due to the Basel 3.1 standards as a reason why there should be a reduction in Pillar 2A requirements for SDDTs.

9.41 The PRA welcomes this response. The estimates in CP7/24 (Charts 1-3 in Chapter 9 in the CP) showed the proposals could affect SDDT-eligible firms’ capital stacks in different directions and to varying degrees. For instance, the respondent’s estimates of the directions in which its Pillar 2A requirements and buffers could change under the proposals are consistent with the PRA’s estimates for SDDT-eligible firms as a whole that were shown in Chart 3 in CP7/24.

9.42 Having considered the response about the way the SDDT capital regime should be designed, the PRA considers the calibration of the SDDT regime set out in this statement would be appropriate for SDDTs. As set out in paragraph 9.72 in CP7/24, the PRA considered the proposed SDDT capital regime would maintain resilience among SDDTs, individually and as a cohort, both relative to now and outside the SDDT regime. The PRA considers this remains the case for the near-final policy set out in this statement, see Chart 2. Chart 2 also shows that the SDDT stack is closer to the current stack and further away from the stack outside the SDDT regime under the near-final policy (and updated data) than under the proposals.

Chart 2: The capital stack for SDDTs as a whole under the near-final policy ^(a)(b)(c)

9.43 One respondent highlighted the impact on the top of the capital stack of moving between the buckets in the proposed approach to operational risk. It estimated the (positive) difference between its capital stack under the proposals and its current stack could increase by almost 60% if it moved from bucket 1 to bucket 2.

9.44 As set out in Chapter 3, the PRA is not proceeding with the bucketing approach for operational risk under the near-final policy.

9.45 One respondent argued that SDDTs that would face capital stacks under the proposals that are higher than current capital stacks would reduce lending, which would be detrimental to economic growth.

9.46 The PRA acknowledged in CP7/24 that capital stacks under the proposals could be higher under the proposals than currently but lower than outside the SDDT regime (see Chart 3 in the CP). However, the proposals could have effects on lending via other channels. The application of the Basel 3.1 standardised approach to credit risk would improve risk capture for SDDTs; Chart 1 in CP7/24 showed the application of the Basel 3.1 standardised approach to credit risk could have a negative effect on capital stacks for some SDDTs. The simplifications to the capital regime for SDDTs could reduce SDDTs’ costs, which may support lending by SDDTs. To be subject to the SDDT capital regime, a firm that meets the SDDT criteria has chosen to become an SDDT. If a firm felt it was unable to price its loans competitively given its capital stack under SDDT capital regime, it could choose to not be an SDDT.

9.47 Chart 3 in CP7/24 showed that the ratio of minimum capital requirements (ie Pillar 1 plus Pillar 2A requirements) to buffers would be higher under the proposals than under the current capital framework and outside the SDDT regime.

9.48 One respondent questioned why the PRA intends to shift the balance between minimum requirements and buffers in this way given that the difference between minimum requirements and buffers is an important legal distinction (eg because buffers can be used to absorb losses as required, during times of stress).

9.49 Having considered this response, the PRA continues to be content with the calibration of Pillar 2A requirements and buffers for SDDTs and the resulting balance between minimum requirements and buffers in the SDDT regime given the simpler business models and non-systemic nature of SDDTs (see paragraph 1.21 in CP7/24). Chart 2 shows that the ratio of minimum capital requirements to buffers would be higher under the near-final policy set out in this near-final PS than under the current capital framework and outside the SDDT regime. The PRA explained in paragraph 3.10 in CP7/24: the PRA’s view of the risks to which SDDTs are exposed and its risk appetite were unchanged under the proposed Pillar 2A framework for SDDTs; and that the proposed Pillar 2A methodologies should not lead to significantly different capitalisation for SDDTs relative to the existing methodologies for the different risk types. However, the proposed removal of two complex Pillar 2A adjustments would generally lead to somewhat higher Pillar 2A requirements for SDDTs relative to current requirements (paragraph 3.59 in CP7/24). Box A in Chapter 4 of CP7/24 described analysis that indicated an SCB of no less than 3.5% of RWAs would provide a sufficient capacity for, on average, SDDTs to withstand a severe but plausible stress without breaching their total capital requirements. These arguments also apply to the near-final policies for Pillar 2A and the SCB set out in this near-final PS.

Summary of the costs and benefits in Part 2

9.50 In Table 11 in CP7/24, the PRA presented quantitative estimates of the aggregate ongoing benefits and aggregate ongoing and one-off costs in Part 2 of the aggregated CBA. As in the rest of the aggregated CBA, the PRA produced the estimates assuming all firms it estimated meet the SDDT criteria^{footnote [77]} would become SDDTs and hence be subject to the proposed SDDT capital regime. However, the PRA also presented a sensitivity analysis to show how the quantitative estimates of the aggregate net benefits of the proposals in Part 2 could change if not all these firms became SDDTs.

9.51 One respondent argued that the sensitivity analysis appeared not to exclude firms that are fast growing. It added that a refreshed aggregated CBA based on the firms that have opted to become SDDTs would be welcome.

9.52 Having considered this response, the PRA clarifies that the sensitivity analysis in CP7/24 did exclude fast-growing firms. Paragraph 9.74 in the CP presented the estimated net benefits if two types of SDDT-eligible firms did not become SDDTs: SDDT-eligible firms that the PRA considered intended to grow fast; and SDDT-eligible firms that the PRA estimated would see higher capital requirements plus buffers in the SDDT capital regime than outside the regime.

9.53 The PRA does not consider a presentation of the aggregated CBA for those firms that have become SDDTs would provide useful additional information for two reasons. First, the sensitivity analysis in CP7/24 already showed how the net benefits could change if the number of SDDTs was less than the number of estimated SDDT-eligible firms. Second, a presentation of the net benefits based on those firms that are SDDTs on a given date would implicitly assume no further SDDT-eligible firms could become SDDTs, but, in practice, firms that meet the SDDT criteria could become SDDTs after that date.

Updated analysis of benefits

Corrections to the aggregated CBA

9.54 After the publication of CP7/24, the PRA found some errors in the calculation of the estimated benefits of the reporting changes proposed in CP7/24. Some of the values of the effective differences between the number of cells an SDDT would report under the proposals compared to outside the SDDT regime that were reported in Table 10 in CP7/24 were incorrect, which resulted in an overstatement of the estimated cost savings. The aggregate per-annum net benefit associated with the proposed reporting changes (which were reported in Table 11 in CP7/24) should have been between £0.55 million and £1.11 million, rather than between £0.59 million and £1.17 million. This PRA does not consider it needs to make any changes to its near-final rules specifically as a result of this correction.

Updated estimates of benefits

9.55 FSMA 138J(5) requires the PRA to prepare a cost benefit analysis if the rules differ from the proposed rules in a way which is, in the opinion of the PRA, significant. The PRA does not consider the difference between the rules proposed in CP7/24 and the near-final rules set out in Appendix 2 to be significant. However, to help stakeholders understand the impact of differences between the proposals and near-final rules, this near-final PS provides updated estimates of the benefits of the changes to SDDTs’ reporting requirements (which require changes to rules). This near-final PS also provides updated estimates of the benefits of the reforms to the frequency of updates to SDDTs’ ICAAP documents (which is set out in SS4/25).

9.56 The aggregated CBA in CP7/24 included quantitative estimates of the benefits associated with the ICAAP and reporting requirements proposals. The updated estimates shown in this near-final PS are calculated using the methods used in CP7/24.^{footnote [78]}

9.57 The aggregated CBA in CP7/24 used regulatory returns data from the end of 2022. Those data were used to estimate the firms that meet the SDDT criteria (ie SDDT-eligible firms) and in the calculations based on balance sheet data (eg the impact on overall capital requirements and buffers). The updated analyses presented in this section (and in Chart 2) use data from the end of 2024 so that the analysis is timelier and more relevant to SDDTs and other firms that meet the SDDT criteria. Based on these data, there are 84 SDDT-eligible firms compared with 80 such firms in the aggregated CBA in CP7/24. To isolate the impact of the changes to the draft policy, the benefits for the proposals in CP7/24 has been estimated based on the updated cohort of SDDT-eligible firms.

9.58 The PRA estimates under the changes set out in this near-final PS , the simplifications to SDDTs’ reporting requirements would generate annual benefits between £10,000 and £20,000 per SDDT and between £0.85 million and £1.70 million in total for the cohort of SDDT-eligible firms. This compares estimated benefits under the CP7/24 proposals of between £7,000 and £14,000 per SDDT and between £0.58 million and £1.16 million in total for the cohort of SDDT-eligible firms.^{footnote [79]} The increase in the benefits reflects the fact SDDTs will be descoped from more reporting templates under the near-final policy than under the proposals in CP7/24.

9.59 The proposed changes to the ICAAP policy for SDDTs that was set out in CP7/24 would reduce the frequency that SDDTs that are not new and growing banks would be expected to document and update their ICAAPs from at least annually to at least every two years except in the case of the Pillar 2A and Pillar 2B elements of the ICAAP document. In the aggregated CBA in CP7/24, the benefits of this proposal were combined with the benefits of the proposal to reduce the frequency that SDDTs that are not new and growing banks would be expected to document and update its Internal Liquidity Adequacy Assessment Process (ILAAP). Under the near-final policy set out in Chapter 5 in this near-final PS, the frequency that SDDTs that are not new and growing banks would be expected to document and update its ICAAP in its entirety (ie including the Pillar 2A and Pillar 2B elements) would reduce from at least annually to at least every two years. The estimated benefits of the changes to ICAAP and ILAAP frequency under the near-final policy are between £71,000 and £285,000 per SDDT for those that are not new and growing banks and between £4.84 million and £19.37 million in total for the cohort of SDDT-eligible firms over a two-year period. The estimated benefits of the change to ICAAP and ILAAP frequency under the CP7/24 proposals are between £43,000 and £171,000 per SDDT for those that are not new and growing banks and between £2.91 million and £11.62 million in total for the cohort of SDDT-eligible firms over a two-year period.^{footnote [80]} The increased benefits are the costs SDDTs that are not new and growing banks save from only having to update the Pillar 2A and Pillar 2B elements of their ICAAP documents every two years rather than every year.